Intellectual Property Valuation Trends for 2013

Tue, 1/15/2013 - 8:35AM — ROY D’SOUZA

2013 has begun with a conclusion to the highly publicized FTC investigation of Google, and its subsidiary Motorola Mobility (MM), regarding alleged anti-competitive practices. At issue were standard essential patents (SEP’s) Google acquired via the MM purchase and what such concentrated IP ownership would mean for the mobile technology industry. This comes after the February 2012 U.S. Department of Justice’s Antitrust Division closure of investigations into three acquisitions of significant patent portfolios that includes SEP’s: Rockstar Bidco/Nortel, Apple/Novell, and Google/Motorola Mobility.

There are those who feel that the FTC’s ruling will stifle innovation or participation in standard settings organizations (SSO’s) and others who assert that it allows innovation to flourish due to limitations on injunctions and “hold ups” on FRAND (Fair Reasonable and Non-Discriminatory) licensing activity of SEP’s. At issue then, is whether the decision has any immediate impact on asset value and as a result any implications for patent transaction activity going forward.

As part of the settlement Google agreed to a Consent Order that prohibits it from seeking injunctions against a willing licensee, either in federal court or at the ITC, to block the use of any SEP’s that the company has previously committed to license on FRAND terms. By agreeing to this, some have concluded that Google’s future profitability will be weakened since a patent’s key attribute is its “right to exclude” competitors. While this may seem intuitive, a closer look reveals one interpretation that the decision produces neutral to positive value creation. Patent value is heavily driven by the number and availability of substitute technologies, the fewer the substitutes the higher the patent value. Normally this would hold since the inability to exclude competitors would result in future market share lower than in competitors’ absence. The caveat is that the competitors must pay royalties to the SEP holder (Google in this case) so the forgone market share is potentially offset. In addition to increases in top line revenue, the settlement may positively alter the risk profile of SEP portfolios.

Some may argue that the decision affirms a long-standing assumption that non-exclusive licensing of any nature commonly occurs at rates that are lower than exclusive activity. If this holds true, the licensor may feel that broad licensing from the adoption of its technology in a standard and its FRAND obligations will give it the volume it requires from a running royalty agreement scenario to help make up for this potential deficiency. However, some royalty rate studies have concluded no material difference between exclusive and non-exclusive rates and in some industries, non-exclusive rates were actually higher. The FTC ruling establishes procedural mechanisms which may be used for determination of FRAND royalties for the SEP portfolio, including through arbitration, if these mechanisms become the norm, they may diminish the patent holders leverage and hence, in practice, could negatively impact value.

 

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Roy D'Souza is a Managing Director responsible for leading Ocean Tomo’s Valuation practice. Mr. D’Souza’s work has focused on valuations of intangible, intellectual property, and tangible assets for acquisitions and divestitures, bankruptcy and restructuring, establishment of intellectual property monetization strategies including licensing, mergers and joint venture/partnership formations, litigation support, and financial reporting and tax matters. Mr. D’Souza also has experience performing business enterprise, equity and debt valuations. Industries in which he has experience include wireless and wired communications, semiconductors, life sciences/pharmaceuticals, computer hardware and software, various light and heavy manufacturing (e.g., pulp/paper, automotive, plastics), and energy/utilities (primarily power generation).

Contact: RdsouzaBlogs@OceanTomo.com

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