Carrots and Coins: The 2018 IP Valuation Year in Review:

A lot has been written on the impact of the new leadership at the USPTO on the value of patents.  Since his appointment in early 2018, Director Andrei Iancu has managed to introduce new initiatives that increase transparency and uniformity in how the USPTO and the courts interpret patent claims and validity challenges, reforms that are largely considered to have a positive impact on the value of patents.  Some market followers who keep track of the venerable “pendulum”, which signals the patent climate de-jour, were quick to note that the pendulum started swinging ever so slightly back in favor of patents (as evidenced by some renewed interest in the patent marketplace).

From an IP valuation perspective, one should take a broader view at the factors impacting the value of IP Assets, patents as well as other assets.  While patents are legal rights that are profoundly impacted by case law and the USPTO examination policy, focusing on legislative and judicial developments in the US alone constitute a very narrow lens by which to evaluate IP portfolios and the value they bring to the companies that hold them.

Below are some of the main trends in that we have seen in 2018, based on the IP portfolios and transactions that came through the door in our IP valuation practice:

  1. Over the last year, we have seen a clear increase in the weight of foreign assets in the IP portfolios presented to us; it used to be the case that the vast majority of assets were US assets, with a few counterparts that served more as a placeholder and less as a driver of economic value. Over the last couple of years, we have seen more and more patent portfolios used to support funding, strategic collaborations, international expansion or the sale of a company, where the major corpus of assets were foreign assets.  More specifically, we have seen German, Korean, Chinese and Japanese assets anchoring an entire portfolio with very little and sometime no US counterparts at all.  This is a telling sign of the increasing state of enforcement in foreign markets, as well as the increasing economic activity in foreign markets, which are usually the two reasons driving patenting decisions.  I will stop short of also saying that this is a sign of the weakness of the US patent market, because I don’t believe that to be the case.  Patenting decisions are made years in advance of the patent actually showing up.  I also don’t believe that to be a ‘zero sum game’, i.e., if foreign IP assets drive more value, it doesn’t mean the US assets are worth less, but rather the entire pie is probably worth more.
  1. Another trend that we are seeing emerge is the return of “carrot licensing”, which is a term used to reference licensing activity that is driven by technology transfer, as opposed to licensing driven by enforcement (also known as “stick” licensing). This form of licensing is more closely associated with emerging technologies, where the licensor is interested in creating markets for new products using an idea protected either by trade secrets or by patents.  With enforcement models taking a back seat for a variety of legal and judicial reasons, particularly in the US, we are seeing more and more licensing activities involving new technologies and the IP rights protecting them.  While enforcement is looking into infringement in mature markets, technology transfer is looking to carve new markets. This is a clear indication not only of the decline in the value of patents as “naked assets”, but it also indicated the increase of trade secrets as a form of IP protection that can be monetized together or apart from patents.  We worked with a few European companies looking to expand worldwide using IP licensing as their main business model, seeing that IP licensing allows expansion into new regions without bearing the marketing, manufacturing and distribution cost associated with the complementary business assets needed to bring new technology to market.
  1. There is a wave of innovation in the area of biotechnology, leverging on novel methods for molecular diagnostics and other technologies enabled by advances in genetic sequencing and gene editing, as well as the convergence of science with big data analytics and artificial intelligence (AI). Many of these technologies are initially developed by startup companies, that end up licensing to, or being acquired by, larger players.  In such acquisitions or collaborations, we have seen IP rights – patents in particular – play a key role in determining the price and terms of the deal.  IP assets in these areas are very valuable, and they gain their value from a technology transfer and new market perspective.  As a matter of fact, IP assets in biotech and other life sciences companies are so valuable that they often survive the company even if the startup goes bankrupt for lack of funding, particularly if regulatory (FDA) approvals have been secured and other product milestones have been met.
  1. Over the last couple of years, we have seen the emergence of new digital assets: databases, cryptocurrency, and other types of assets that made their way from the digital world into the business world. The valuation profession is slow to keep up with these assets, and as a result we have to be very creative in how we value them, as no guidelines, comparable transactions or other points of reference exist.  One interesting case we have worked on this year involves the valuation of a digital token for a token-presale (a token is an asset used in a Blockchain environment to facilitate transactions on the network).  From a valuation perspective, valuing tokens and cryptocurrency in general poses a challenge, as the very nature of the asset is not clearly defined: is it a security, a commodity or a currency? Should the asset, and therefore the valuation thereof, be regulated by the SEC? Many of these valuations are done for tax reporting purposes, however there is no clear policy by the IRS on some of these assets and the regulations are evolving, which makes the valuation exercise somewhat of a moving target.

In conclusion, our experience in 2018 indicated that patents are only one component of the modern company’s IP portfolio.  There are other types of intangible assets, including new categories of assets we haven’t seen before, that are emerging in the new digital economy, posing new valuation challenges but adding more sources of value for companies.  Additionally, new technological advances are creating fertile ground for technology transfer and open innovation, processes that depend on IP rights and which give IP Assets great value.

FIRRMA and its Impact on That Which it Seeks to Protect

The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) was signed into law by the current Administration on August 13, 2018, to protect US technological superiority and address national security risks associated with the ability of foreign parties to obtain equity interests in domestic businesses and influence decisions or obtain information related to critical US technologies. However, FIRRMA poses a threat to a wide range of innovative industries, including Biotech, Aerospace, and Nanotechnology, by adding increased governmental scrutiny that may restrict the funding needed by entrepreneurs seeking to build the next-gen technologies. Without the funding necessary to take the risks necessary to develop these next-gen technologies, FIRRMA may erode the technological superiority it seeks to protect. Moreover, the pace of innovation in other parts of the world may increase as corporations are free to accept the investments that US companies are denied because of FIRRMA.

FIRRMA is designed to reform and modernize the review process of the Committee on Foreign Investment in the United States (CFIUS) and gives CFIUS authority over technology transfers. FIRRMA modified and broadened the power of the president and CFIUS by expanding the scope of foreign investments in the US subject to national security review. CFIUS’ authority applies to the technology transfers of US businesses to foreign organizations as well as domestic organizations that are controlled by a non-US person. While FIRRMA will not be fully implemented until February 2020, the US Department of the Treasury issued temporary regulations in October 2018 through a pilot program to address what it considers to be critical American technology and intellectual property from potentially harmful foreign acquisitions.

The pilot program implements two sections of FIRRMA that did not take effect upon FIRRMA’s enactment. The first section expands the scope of transactions subject to review by CFIUS to include certain investments involving foreign persons and critical technologies. The second section makes effective FIRRMA’s mandatory declarations provision for all transactions that fall within the specified scope of the pilot program. The regulations state that the pilot program establishes mandatory declarations for certain transactions involving investments by foreign persons in certain US business that “produce, design, test, manufacture, fabricate, or develop one or more critical technologies.” The language of the temporary regulations may be concerning to businesses seeking investment due to the broad language it contains and without these investments, there will be a negative impact on the types of R&D efforts that facilitate the creation of innovative technologies that generate intellectual property portfolios that can be licensed.

The regulations also state that the purpose of the pilot program is to assess and address ongoing risks to the national security of the US resulting from two urgent and compelling circumstances: (1) the ability and willingness of some foreign parties to obtain equity interests in US business in order to affect certain decisions regarding, or to obtain certain information relating to, critical technologies; and (2) the rapid pace of technological change in certain US industries. While the regulations state that the current Administration “supports protecting our national security from emerging risks while maintaining an open investment policy,” it is unclear how this Administration will utilize this program and how it may impact funding in the US and the downstream impact that this lack of funding may have on IP licensing. In the first quarter of 2018, net foreign direct investment into the US has declined from $146.5 billion in the first quarter of 2016 to $89.7 billion for the same quarter in 2017 to $51.3 billion for the first quarter of 2018.  While most of the decline is attributed to general economic factors, many believe that it also reflects fears of what the administration is going to do given their stance on China and the threat of trade wars and tariffs.

The expansion of CFIUS authority over investments through FIRRMA may lead to decreased interests from foreign individuals, business, and funds that, in part, created an environment for US businesses to secure the technological superiority this Act now seeks to protect. If that is the case, we may see significantly less investment in the industries covered by the pilot program which includes many industries at the forefront on IP licensing activity such as: Computer Storage, Semiconductor, Battery, Aerospace (Aircraft manufacturing, Space Vehicles and Propulsion), BioTech, Wireless Communication Equipment and Nanotechnology.

It is too soon to know the impact FIRRMA will have on US businesses that seek investment to fund the type of research and development necessary to maintain the pace of innovation that led to the US holding a strong position in technological advancement; however, given the current decline in funding, there is a real possibility that these new regulations that are being imposed on US innovation companies may further restrict the funding necessary to drive the US technological superiority that FIRRMA was created to protect.

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