Next up: IP investment banks by Danny Fortson in San Francisco Posted…

Next up: IP investment banks
by Danny Fortson in San Francisco Posted 01:16 EST, 17, Sep 2004


A new breed of intellectual property investment fund managers isn't the only type of financier looking at
patents in a new light. Now sprouting up in Silicon Valley are so-called IP investment banks.

"There's an active market developing to buy and sell patents," says Ron Laurie, formerly a lawyer with
Skadden, Arps, Slate, Meagher & Flom LLP who recently founded Inflexion Point Strategy LLC of Palo
Alto, Calif., with Joe Siino, former head of the IP practice group at Brobeck Phleger & Harrison LLP.
"People have really just recently recognized that IP is an asset class, just like real estate or corporate
securities. All of the things you can do with real estate and corporate securities, you can do with IP."

Adds Ron Epstein, founder and CEO of IPotential LLC, a similar outfit set up earlier this year in San Mateo,
Calif.: "We're in this business to make a market because a market needs to be made." His clients, he says,
range from Fortune 50 companies to venture capital firms to startups. Others doing similar work include IP
Value Management Inc. of Palo Alto, Calif., and ICMB Ocean Tomo of Chicago.

Generating profits from patent portfolios is nothing new, of course. Tech giants such as Texas Instruments
Inc., IBM Corp. and Lucent Technologies Inc. pioneered the practice in the late '80s with the formation of
licensing units that operated as separate business units with a simple strategic goal: Get more money out of
their vast patent portfolios.

But convincing a company that, first, it relies on a technology developed by TI, IBM or Lucent, and second,
that the company should actually pay for it, doesn't generally receive the warmest response. Lawsuits, or at
least the threat of them, are often the negotiating tool of choice for licensing deals.

The three tech giants were able to pursue that IP strategy more effectively after a reliable legal framework was
set up in 1982, when the U.S. government created a new federal court dedicated to patent issues. Prior to
that, patent infringement suits were dealt with by the various federal circuit courts under whose jurisdiction
each case fell.

In other words, how cases were treated varied widely depending on the venue and the IP savviness of the
judge that happened to take the case. The creation of the new court brought a measure of uniformity and
predictability to patent law, both of which had been lacking.

"It really strengthened patents, because now you had a more uniform body of case law, so you knew more
about how the patents were going to be treated in terms of enforcement and validity," says Russell Wong, a
partner at Wong, Cabello, Lutsch, Rutherford & Brucculeri LLP in Houston and former general counsel to
Compaq Computer Corp.

With the establishment of the court, lawsuits and judgments began to rise, which meant increasing work for
law firms charged with prosecuting suits. Consultancies also began offering services to help companies scour
their portfolios for possibly valuable but untapped patents.

The general awakening to the potential of IP, both as an untapped asset and as a potential land mine, opened
a niche for firms that can provide strategic advice that law firms cannot, technical understanding absent at
investment banks and legal expertise that consultancies lack. "This is a normal evolution of the way IP and
patents in particular are being valued by companies and investment groups," says Wong.

IPotential's Epstein says it was during his time at Intel Corp., where he led a 30-person practice to assert the
chip giant's patents while negotiating down claims made against it, that he realized how few industry peers
had a cohesive IP strategy or internal resources devoted to it. He noticed that companies were moving more
aggressively to buy, sell and litigate over these assets and saw middlemen (like him, now) popping up to
broker deals and advise companies on a strategy few had ever contemplated.

Epstein, formerly general counsel to storage company Brocade Communications Systems Inc. after serving
as Intel's director of licensing, started IPotential with the hope of doing for patents what investment banks do
for corporate securities.

The market is still nascent, and the question of just how to value a patent is central to establishing it. Individual
patents are generally priced in tiers: $500,000, $1 million, $2 million, while entire portfolios can fetch up to $25
million to $30 million. There is no standard valuation model, and how much a patent or entire portfolio can
attract is determined by a combination of questions: Is it a technology that is currently used and generating
revenue, or has the potential to be? Has it been litigated? Is it valid and enforceable? Is it infringed? Is there a
buyer?

"It's better if it's a known quantity, especially if it's been litigated, because the validity is solid," says Inflexion
Point Strategy's Laurie. He says many of his clients are private equity firms looking to either build businesses
around IP or to bolster the IP holdings of portfolio companies. "It's just better to buy IP than to make it."

For now, however, most companies take a desultory view of their own IP portfolios and have scant resources
devoted to them. "Sometimes companies are more concerned with numbers, with having as many patents as
their competitors," says John Garland, senior vice president of Clinton, N.J.-based IP advisory firm Thinkfire
Services USA Ltd. and formerly the worldwide director of IP licensing at Lucent. "But it's not just about the
numbers, it's about whether they are useful and commercially significant. That's the name of this game."

How successful these middlemen will be remains an open question. None will reveal any of their clients
because of confidentiality agreements or provide any indication of financial performance. "It's in corporate's
best interest to get a lot more savvy in this area as quickly as possible, or you're going to be paying a lot of
money for this service when you don't really need to," says a top executive at a leading Silicon Valley tech
company, requesting anonymity. "There is a niche, but I think that it's going to be short-lived."

What's more certain is that the new firms are just the visible manifestation of larger forces at work. More
companies are shaking the dust off patent portfolios to see whether they can extract some money out of them
or just to build their defenses as investment consortia such as Intellectual Ventures search for IP diamonds in
the rough.

"In the end, there are valid, enforceable and infringed patents, and if you're in the business of selling complex
manufactured goods, you're going to infringe them," Epstein says. "The people on the defensive side of this
thing just don't really grok the threat, and therefore have yet to begin taking actions necessary to deal with it.
There will be people who get to be very successful before action is taken to deal with it."