05 Jun’18

Geoffrey the $500M Giraffe

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The Toys “R“ Us bankruptcy has been in the news over the last year. The company’s downfall has been well documented, and the unfortunate fate of the brand that has been ubiquitous in the toy world for several generations of kids and parents was emotional for many. Although a variety of shortcomings of the company’s long-term strategy and operations have come to light, it seems that a solid intellectual property strategy may be offering the toy retailer a small “saving grace” as its story comes to a close – or at least some hope for the company’s creditors.

As part of the bankruptcy proceedings, Toys “R” Us is auctioning off much of its intellectual property (IP) to help cover its debt and legal fees. The IP in the sale includes the Toys “R” Us name, the Babies “R” Us brand, a collection of domain names, and the beloved Geoffrey the Giraffe mascot and logo.  More specifically, according to an article on Entrepreneur.com, the sale of the IP is expected to cover $200 million in debt and anticipated legal fees of up to $348 million (fees which they keep accruing at an astounding rate of $1,745/hour, according to one NY Times article)– for a total of nearly $550 million. Important to note is that the IP value proxy for Toys “R” Us was determined based on a likely value to be realized at an auction. Historically, intangible assets have sold at steep discounts through the auction process, and the true value of the IP assets is presumably much greater in the hands of the buyer.

According to US generally accepted accounting principles (GAAP) as well as the international financial reporting standards (IFRS) a company’s internally-generated intangible assets, including brands and related trademarks, are not reported as an asset on the company’s balance sheet.  As a result of this reporting gap, investors, as well as the general public, never gain a full understanding of the fair value of such intangible assets. In this case, although an official valuation of the Toys “R” Us brand has not been disclosed in the company’s financial statements, we get a glimpse at just how valuable a solid IP portfolio can be, as we see its potential to cover millions in debt and legal fees. For purposes of this post only, we compared the anticipated IP value of $548 million against Toys “R” Us’ last available balance sheet as of October 28, 2017, as seen below:

We specifically highlight the comparison of IP value to the Total Asset Value of Toys “R” Us. We see that the assumed IP value represents 8% of the total reported assets for the company – a significant proportion for an asset that goes unreported. Naturally, one would classify any asset representing 8% of the total book value as a fairly significant asset. However, when we look at some of the world’s most valuable consumer brands, we see that brands can actually have the potential to account for a far more significant portion of Total Asset Value, as reported on the balance sheet. Every year, Interbrand (a UK-based marketing consulting firm) publishes its “Best Global Brand Rankings” in which it ranks companies by the value of their respective brands. To better understand the hidden, off balance sheet value of IP assets, we applied the same IP Value-to-Total Asset Value ratio that we examined with Toys “R” Us to 3 of the top-ranked consumer brands in the study. According to Interbrand’s 2017 brand ranking study, Apple, Coke, and Nike boast brand values of $184 billion, $70 billion, and $27 billion respectively. Taken alone, these values are significant; however, when compared to the Total Asset  Value on each company’s balance sheet, we begin to see the true magnitude of these unreported assets. Below is a table showing the brand value as a percentage of the most recently reported Total Asset Value for each of these 3 companies:

It is eye opening, to say the least, seeing the relative value of these “hidden” assets for some of the world’s largest companies. Nike, for example, owns a brand that is worth over 100% of the total value of its publicly disclosed assets. Apple’s brand is reportedly worth 50% of its total asset value – and it is important to remember that the Interbrand values do not include other forms of IP, such as patents, technology, know-how, etc. which are highly valuable intangible assets for Apple.

Since internally generated intangible assets are not reported in financial statements, in many cases, the public does not gain an understanding of the assets’ fair value until these assets are sold independently or as part of an M&A deal.  When a company experiences financial distress and is forced to liquidate its assets to pay back creditors (see the Nortel IP auction for one of the most famous instances), often IP assets are the only assets which have value, since they can be monetized at the hands of a new buyer. Such is the case with Toys “R” Us; we did not see the true value of Geoffrey the Giraffe until it was too late.

Full article here
03 May’18

IP Monetization: Realizing Hidden Value in Time of Decline

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Management teams of high-tech companies often overlook the additional shareholder value to be realized by developing strong IP portfolios, and are therefore ill-equipped to extract that value in times of decline in their companies’ life cycle.

The Business Life Cycle of high-tech companies has been a path well-traveled, and the management teams of most high-tech companies are guilty of missing an important fork in the road off that beaten path. Traditionally, the “Business Life Cycle” consists of 4 stages; Startup, Growth, Maturity, & Decline. Many companies fall under one of these broad categories, and furthermore, many management teams make key business decisions based on what the definition of their current stage tells them. The narrow focus of management seeking to move their company along the traditional Business Life Cycle results all-too-often in their untimely arrival to the Decline stage. We at Foresight believe that by implementing the right Intellectual Property (IP) strategies early in the Life Cycle, companies can extend their life cycle and generate additional shareholder value while managing to stave-off heading into a stage of Decline.

Management teams of a business in the Startup stage are focused on product development, developing sales strategies, and doing everything they can to stay afloat. Those fortunate enough to cross the chasm into the Growth phase begin solidifying their internal operations, investing heavily in client relations and new business development, and establishing their position in the market. After several years, the Maturity stage sets in, growth slows, and the business becomes far more predictable. It is at this point that many companies see themselves down one of two paths. The first is the path of reinvestment, under which the company essentially restarts its life cycle with a new product line or new target market or a new acquisition. The second path is one on which a company simply accepts its imminent decline and grinds to a halt. For companies on this path of Decline, management must recognize that there is another fork in the road.

Specifically, in the high-tech industries, it may be time to introduce a stage of the life cycle in between Maturity & Decline. That stage is IP Monetization. Too many high-tech firms live out their days in the Decline stage, winding down the business, losing key customers, and ultimately watching their remaining shareholder value dissipate. At the end, the company’s IP assets – which were once the foundation for years of cashflow –  are liquidated at an auction or through an asset “fire sale”, often at a steep discount. In these cases, the company’s shareholders are missing out on a potential return on investment on the assets that they financed, a return that could have been achieved through the execution of an IP monetization strategy.

Two notable examples of IP Monetization execution are companies such as BlackBerry and TiVo. These companies have successfully extended their life cycles, post-Maturity stage, and have found success in the IP Monetization stage of their corporate life cycle. Shareholder value has been retained as these companies pursue an IP licensing strategy for the technology that once made their operating business a success. For competitors that outlasted the company, or emerging players who are introducing next generation embodiments that leverage the technical innovations of Mature company offerings, the IP assets of post-Maturity stage companies are of extreme value. IP Monetization allows companies such as BlackBerry and TiVo to do 2 things: 1) extract value from their IP portfolio from competitors who may have been infringing during the peak of their competition, or 2) share in the profits of the next iteration of the company’s core technology as next generation companies seek to innovate on the platform of the existing technology. Look no further than TiVo’s recent financial performance for the huge potential to be realized in the IP Monetization stage of business. The company’s revenue grew 57% from 2015-2017, with over 95% of 2017 revenue attributed to “licensing, services and software.”

The key to introducing this new stage of the Business Life Cycle is educating entrepreneurs and managers on the importance of a solid IP strategy early on. Having an understanding of the value of intellectual property outside of a company’s current operating business will ensure that the shareholders who funded the creation of the IP portfolio are able to realize returns on its full value. However, to achieve the full value potential, management must develop a strategy early in the life of the company and endeavor to develop a forward-looking IP portfolio rather than taking the easy road of constructing a portfolio to narrowly protect its product (known as a “defensive” approach). Following a narrow defensive approach to IP management reinforces the traditional Business Life Cycle. It’s time for high-tech companies and their shareholders to take the fork towards IP Monetization and plan for it when they create their IP portfolio and strategy.

Full article here
26 Apr’18

Oil States Energy v. Green’s Energy: Implications for the Patent Market

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World IP Day 2018 coincides with a highly anticipated, landmark decision by the US Supreme Court in the case of OIL STATES ENERGY SERVICES, LLC v. GREENE’S ENERGY GROUP, LLC, ET AL. which relates to the process known as inter partes review (IPR).

Inter Partes Review Process

The IPR process, as introduced by the America Invents Act of 2011, allows any person (other than the patent owner) to file a petition with the USPTO with request for cancellation of one or more claims of a previously issued patent on the grounds that the claim fails the novelty or non-obviousness standards for patentability. Before the USPTO Director can institute an IPR, the Director must determine that there is a reasonable likelihood that the petitioner would prevail with respect to at least one of the claims challenged. Once instituted, the PTAB examines the patent’s validity. The petitioner has the burden of proving unpatentability by a preponderance of the evidence. If there is no agreement between the patent owner and the petitioner to settle the case, the PTAB must issue a written final decision no later than a year after it notices the institution of inter partes review. If the Board’s decision becomes final, the Director must issue and publish a certificate. The certificate cancels patent claims finally determined to be unpatentable, confirms patent claims determined to be patentable, and incorporates into the patent any new or amended claim determined to be patentable. If a party is dissatisfied with the Board’s decision, they can seek judicial review in the Court of Appeals for the Federal Circuit. When reviewing the Board’s decision, the Federal Circuit assess the Board’s compliance with governing legal standards de novo (i.e., without reference to any legal conclusions made by the PTAB) and its underlying factual determinations for substantial evidence.

Oil States Case Overview

Oil States Energy Services and Greene’s Energy Group are both oilfield services companies. Oil States obtained a patent in 2001 relating to an apparatus and method for protecting wellhead equipment used in hydraulic fracturing and in 2012 sued Greene’s Energy for infringing the patent. Greene responded by challenging the patent’s validity and also petitioned the USPTO to institute inter partes review. The USPTO found that Greene had established a reasonable likelihood that the two challenged claims were unpatentable and, thus, instituted inter partes review. Both proceedings progressed in parallel with the District Court ruling in favor of Oil States and then the USPTO issuing a final written decision concluding that the claims were unpatentable. Oil States sought review in the Federal Circuit challenging the Board’s decision as well as challenging the constitutionality of inter partes review.  The Federal Court affirmed the Board’s decision in favor of Greene that the claims were unpatentable.  Oil States, in challenging the constitutionality of inter partes review, argued before the Supreme Court that actions to revoke a patent must be tried in an Article III court before a jury.  Oil States wanted the Court to recognize patent rights as the private property of the patentee which would bring it into the domain of Article III Courts.  Article III vests the judicial power of the United States in one Supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish. Consequently, Congress cannot confer the Government’s judicial power on entities outside Article III. When determining whether a proceeding involves an exercise of Article III judicial power, the Court’s precedents have distinguished between public rights and private rights. Those precedents have given Congress significant latitude to assign adjudication of public rights to entities other than Article III Courts.

Supreme Court Oil States’ Decision

The Supreme Court held that the determination to grant a patent is a matter involving public rights and need not be adjudicated in Article III court.  By issuing patents, the USPTO takes from the public rights of immense value, and bestows them upon the patentee. Specifically, patents are public franchises that the government grants to the inventors of new and useful improvements. The franchise gives the patent owner the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States. Additionally, granting patents is one of the constitutional functions that can be carried out by the executive or legislative departments without judicial determination. When the USPTO adjudicates the patentability of inventions, it is exercising the executive power. Inter partes review involves the same basic matter as the grant of a patent, and it therefore falls on the public rights side of the line. Like the initial review, the Board’s inter partes review protects the public’s paramount interest in seeing that patent monopolies are kept within their legitimate scope.

Foresight’s Commentary on the Oil States decision

The Oil States makes clear the power of Congress to provide the USPTO with broad post-issuance authority. In other words, the status quo remains in the US patent market. From a patent valuation perspective, IPRs have already negatively impacted the value of patents due the uncertainty coupled to these proceedings. The Oil States decision reinforces the constitutionality of IPR proceedings and may further complicate the processes by which patent owners monetize their assets and would add Oil States to the list of cases such as Alice and Mayo that reinforce the uncertainty in the market regarding the patentability of cutting edge inventions.

While the Supreme Court’s Oil States decision has been largely anticipated by the IP community, one should review it in conjunction with Andrei Iancu’s recent public statements, which might arguably be the more interesting development this week. Director Iancu’s statement that “human-made algorithms that are cooked up, invented as a result of human ingenuity are different from discoveries and mathematical representations of those discoveries” might signal an effort by the Director to push for changes in validity considerations that would include these algorithms that can be distinguished from mathematical representations of discoveries. This statement may signal the emergence of a market for patents claiming algorithms, a market that currently resides behind NDAs and trade secret protection.

** Foresight’s commentary to Oil States, along with the commentary of other industry leaders, was published by IPWatchdog.

Full article here
16 Jan’18

Insights from WIPO’s “World IP Indicators 2017” Report: Key Patenting Trends Around the Globe

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The World IP Organization (WIPO) has recently published its annual report titled: “World Intellectual Property Indicators 2017”, covering world IP filing activity for 2016.  The report is a comprehensive coverage of global patent and trademark filing trends, comparing and ranking the world’s leading regional patent and trademark offices (“IP Offices”) by their level of activity in the various categories.

At a high level, it seems like many of the trends observed in 2015 continue into 2016: the global number of filings and grants keeps trending up; China continues to dominate in terms of annual filings and grants (breaking another record of 1.3 million filings this year); and the top 10 filing companies worldwide are all Asia-based multinationals.

Patent Filing Trends

A record number of 3 million patent applications were filed worldwide in 2016, up 8.3% from 2015, as seen in the figure below:

Source: World IP Indicators 2017, WIPO

Driving the strong growth in global filings was an exceptional number of filings in China. The State Intellectual Property Office of the People’s Republic of China (SIPO) received 1.3 million patent applications in 2016 – more than the combined total for the United States Patent and Trademark Office (USPTO; 605,571), the Japan Patent Office (JPO; 318,381), the Korean Intellectual Property Office (KIPO; 208,830) and the European Patent Office (EPO; 159,358). Together, these top five offices accounted for 84% of the world total in 2016.

Below is a summary table showing the activity in the top 10 IP Offices in 2016:

Source: World IP Indicators 2017, WIPO

When it comes to understanding China’s continued explosive growth in new patent applications – over 1.3 million filed in 2016, an increase from the 1.1 million in 2015 (the first year the 1 million filings barrier has been exceeded in any country) — the circumstances surrounding the increase in Chinese patent filings are unique and should have come as no surprise to anyone following the Chinese government’s five-year plan of 2011. As explained in an article published in Nov. 2016 in the EE Times by Foresight’s president, Efrat Kasznik, over the last 50 years the Chinese Communist Party implemented a series of five-year plans which guided China’s rapid economic growth.  The 2011 five-year plan’s themes of sustainable growth included some specific targets for patent filing per capita.  The increased filing activity over the last five years is the direct result of a calculated government effort, enabled by an unprecedented allocation of legislative and administrative resources to support China’s State IP Office. Thus, the sharp rise in Chinese patent filings between 2010 and 2016 is very unique to China’s political circumstances, and is not necessarily correlated with the natural progression of innovation.

When reviewing filing trends by country, one of the most critical observations is the ratio of resident to non-resident filings.  A higher ratio of non-resident filings in any given country, is usually an indication not only of the size of that market for the underlying innovations, but also of the strength of the IP enforcement regime in that country.  Here, the trends from 2015 are repeating in 2016: as explained by Ms. Kasznik in her article, ratio in China is about 90% resident filers to 10% non-resident filers, a reflection of the relatively weak enforcement regime in China.  Conversely, the USPTO and the European Patent Office exhibit a ratio of resident to non-resident filings of about 50/50, attesting to the strength of IP enforcement regimes in those regions.

Patent Grants Trends

In 2016, an estimated 1.35 million patents were granted worldwide, up 8.9% on 2015.

Source: World IP Indicators 2017, WIPO

SIPO granted 404,208 patents in 2016, followed by the USPTO (303,049), the JPO (203,087), KIPO (108,875) and the EPO (95,956). The top five IP offices issued more than 1.1 million combined, accounting for 83% of the world total.

Not surprisingly, the number of new grants is trending upwards over time along with the number of new filings.  The WIPO report also includes statistics related to the operational efficiency of IP offices, such as: the number of examiners, application pendency times, and patent examination outcomes.  The workload of IP offices as measured by the number of incoming patent applications has increased over time, but so has their examination capacity to process those applications. The WIPO data show there has been no significant increase in application-to examiner ratios, and for a number of IP offices, growth in numbers of examiners has outstripped the increase in applications.

Another interesting metric reported is the number of patents in force in 2016: the estimated number of patents in force worldwide rose from 7.8 million in 2009 to 11.8 million in 2016. The USPTO leads with 2.8 million patents in force in 2016, followed by the JPO (2 million), SIPO (1.8 million) and KIPO (1 million). These four IP offices account for 63% of all patents in force worldwide.

Filing by Company

The top 10 patent applicants worldwide are Asia-based multinationals: Canon Inc. (Japan) was the top applicant for the period from 2011 to 2014, with 30,476 patent families worldwide, followed by Samsung Electronics (Korea) with 26,609 patent families, and Japanese companies Panasonic (22,899), Toshiba (22,627) and Toyota (22,190). Robert Bosch of Germany (16,582) was the highest-ranking non-Asian company at number 12.

Only 9 countries of origin comprise the top 100 list of applicant companies for the period from 2011 to 2014: Japan (40), China (26), Korea (15), U.S. (9), Germany (6) and one each from France, the Netherlands, Sweden and Taiwan.

 

 

Full article here