Blog Post 07.30.20
Podcast
Episode #13: Monetizing Intellectual Property Portfolios (Drew Schulte)
Podcast
07.24.20
Drew Schulte and host Joel Simon discuss how IP portfolios can serve as a viable lifeline for businesses and strategic investments.
(Editor’s note: transcript edited for clarity.)
Hi and welcome to Pillsbury’s Industry Insights podcast where we discuss current, legal and practical issues in finance and related sectors. I’m Joel Simon, a partner at the international law firm, Pillsbury Winthrop Shaw Pittman. To all our listeners out there, welcome and thank you for your continuing interest in our podcast. Today, I’ll be speaking with Drew Schulte, a counsel in our international property practice. Drew focuses his practice on optimizing his client’s intellectual property portfolios for their specific needs, whether they include generating licensing revenue, securing additional rounds of investor funding or gaining a competitive edge, Drew strives to recommend global solutions while navigating the nuances of specific jurisdictions.
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Joel Simon: The headlines for the economy the past few months have focused on closings and reopenings, as well as loans and grants under different federal stimulus packages. We’ve also seen a number of restructuring and assorted bankruptcies, although not the deluge that some expected. But today we’d like to turn our attention to alternate sources of revenue and liquidity that don’t rely on the government. Drew, what can you tell us about intellectual property and patents as a solution for companies that have those assets?
Drew Schule: Intellectual property—whether you’re talking about selling IP that you already have or adopting strategies for managing the development of that IP—is one way that companies can solve liquidity issues without having to reach out for additional government sources. So when I’m speaking about IP as an intellectual property, I’m talking about the rights granted in the form of patents, trademarks, copyrights or even trade secrets, as opposed to just technology in general. The latter would be more like the algorithm you use—the data, the ideas, the current progress and projects that your team may be developing. Today’s discussion will really focus on patents. Mainly because patents are a little bit harder to conceptualize and a little bit more difficult to figure out how to use. When you’re talking about executive level decision-makers, I think the patent portfolio is something that they really look at and say, “This is costing us a lot. What can we do with this? Why do we have it?”
Simon: It sounds like there is both a cost element to this and possible cost reduction strategies, as well as a revenue element and revenue-generating strategies.
Schulte: That is correct. When you’re talking about patents, normally how the patenting process will work is you will have your investors and engineers and they will create or come up with some kind of idea. This might be an idea that they’re just working on in their research and development. It might be a new product that they’re coming out with that has some kind of key technology or key changes. You’ll take the information about that new product or about that research, and you’ll draft a patent on it or a patent application, and that patent application will cover all the ins and outs of the new product—how it functions—the benefits it achieves, and you’ll file that with a U.S. Patent Office. Just a quick side note that each different jurisdiction—so the U.S., China, Japan—all these places have their separate patent offices because patents have a territorial aspect. And there’s usually an initial up-front cost of paying for the actual drafting of the application. There’s going to be the cost of prosecuting it through any given patent office. When you send it to the patent office, they’ll take a look and say, “Okay, this is patentable. We’ll give you the patent.” Or they may say, “No, we have other things—other reasons why this is not patentable,” in which case, you’re going to have your attorney either argue back or amend your application, so there’s some cost generated there, as well. But there’s also just what’s called maintenance or Moody fees. A third cost which is also tangential to this is when you’re trying to go in multiple jurisdictions, it’s going to require you to file separate patent applications in each of those jurisdictions. And while some of the arguments—the amendments—of that initial draft of the application may be the same, you’re still going to get this almost exponential increase in cost as you’re pursuing the application in multiple jurisdictions. What compounds this even more is most companies come out with new products, and most companies have research and development that’s constantly ongoing, which means they’re filing multiple patents. When you’re asking what does my portfolio look like, you’re talking about all of these different patents and patent applications that you have pending across the world. That’s when companies really start to see the cost impact. Being able to tailor your given approach to that business goal that you have is a way to make sure that you can cultivate your portfolio at the most cost-effective and useful way for you. Once you have an idea of how much each of these patents cost, then you start looking at your portfolio at large—what do you want to get out of this patent portfolio? Based on that [answer], you can start to cultivate and trim your cost into something that’s a lot of more manageable.
Simon: It sounds like a company doesn’t necessarily have to protect a patent in every corner of the world, depending on what its use is and what its business is?
Schulte: When you’re looking at a given jurisdiction, there’s a lot of key factors that people really need to take a hard look at. The first is the size of the jurisdiction. The United States is a large jurisdiction. Europe is also a large jurisdiction that most companies want to go into. And then you start to look at the rest of the world’s GDP countries. We’ve got countries like China, Japan, India, Brazil. After [looking] at the size, [companies] also need to take into account the legal climate in each of those different jurisdictions. What I mean by legal climate is 1) how strong is IP there, and 2) if you ever do need to enforce your IP—to actually sue someone for infringement of your patent—how large are the damages you’re going to be able to achieve? With other countries, it’s more of an unknown. There’s a lot of other factors that you really need to look into to figure out whether or not this is an appropriate legal climate for pursuing IP. The company needs to look at its own capabilities. For example, there’s not going to be a need to build up a huge Japanese patent portfolio if 1) your company doesn’t plan to go into Japan, 2) you’re in a technology that’s rapidly changing and the patents may not be “useful” for a long term, and 3) does that company even have the infrastructure to research and figure out if someone is infringing their product and then to go and try to enforce those. An additional factor might be just your local industry—if you’re talking about an industry that’s very big in Australia, you may wish to have some IP in Australia even if it’s not the largest jurisdiction out there. But each of these different individual considerations are something businesses should really look at when they’re deciding whether or not to pursue IP in a given jurisdiction and where to pursue their IP overall.
Simon: Let’s turn now towards monetization strategies or ways that companies can generate liquidity or revenue…
Schulte: With regards to IP, most people think traditional uses are to protect market share or to defend against potential litigation by having a defensive portfolio, but there are additional ways that you can use your IP assets to start generating revenue immediately, and one of those, and probably the most popular, is to start a licensing program. That means you’re going to take your portfolio and see who is using your IP or wants to use your IP and reach out to them and try to get an IP license from them. To do that, you’re typically going to need to 1) know who’s in your portfolio. Do a review of your patents and make sure that they are litigation quality assets in case the licensing doesn’t go well. You’ll also need to start finding who is likely to need an IP license and reach out to them.
Another approach to start generating revenue in a non-licensing way would be through different types of corporate strategies. These strategies might include things such as creating a IP holding company so you can put all of your IP from a given company. This would be perhaps in a more tax-friendly jurisdiction. If you’re in the U.S. and you’ve got a large patent portfolio, you could have an IP holding company located abroad. You’ll be paying licensing fees to that IP holding company, and as those licensing fees are not brought back into the U.S., you can defer your tax burden on those. Some jurisdictions have preferable treatment for homegrown inventions. For example, in the United Kingdom, they have what is called the UK Patent Docs Program. You can get a reduction of your taxes on any kind of profits if those profits were derived from an invention that is patented in the UK that was created or derived or invented in the UK. Or you can simply use your current IP to raise capital. You may put up your IP as collateral for a loan or a round of financing in that respect. You also might be able to use your IP in charitable contributions—once again in a way to perhaps defer some of your tax liability as opposed to using an IP holding company.
Simon: One last topic, Drew. Could you touch upon the use of what are called unripened assets and explain what that means?
Shulte: Unripe into assets are assets that may be pending patent applications, or even non-saved patented products—say, for example, research and development that may or may not have any type of patent protection. [In the absence of] immediate cash crunches, most companies would shy away from trying to monetize these unripened assets because it’s more difficult. You may have a project or group that your company has been working on and trying to bring to market, and realize you may just not be able to do it with the given funds, that you might want to try to sell that whole division. Obviously, the buyers for that might be a competitor. There are other options, such as joining a joint venture or trying to donate some of your current pending applications to things called patent pools. While the actual corporate structures and arrangements and agreements might make bringing value out of those a little more complicated, it is something that cash-strapped companies, particularly in the current climate, should really start to look at as a way to bring immediate revenue in the door and to derive value out of something they might otherwise be totally abandoning.
Simon: Drew, you’ve outlined some really great IP strategies for cutting costs and generating revenue. Thank you for joining us today.