Companies are under increased pressure to maximize the value of their assets, and with Big Data and data analytics, we’re in a highly competitive environment.”
Those are the words of Tyler Maddry, partner at Hunton & Williams, explaining why businesses are so focused on finding ways to monetize their IP assets. But this mindset is not limited to just large, multinational tech companies, though it is an important initiative in companies like IBM, which produces the most patents of any US company each year. IP monetization is also a focus for smaller companies, like startups, and even for another fertile source of patents—universities.
Saying that IP monetization is important is easy, but how exactly do businesses and universities go about taking their intellectual property assets and turning them into good old-fashioned revenue?
One common way to generate revenue from a patent portfolio is through licensing. Though, as Julie Watson, special counsel at Marshall, Gerstein & Borun, notes, “Licensing and monetization are two different buckets from the university perspective.” When it comes to for-profit businesses, though, a licensing agreement is a common way to generate a revenue stream from an intellectual property asset.
When it comes to licensing, says Maddry, it's important to note that there are many different ways to license your IP. When a company first decides to do so, it must make a series of important decisions. “There are a number of factors to consider when drafting a licensing grant,” he says. “For example: is it exclusive or non-exclusive? Can you make more money with one exclusive license or a number of non-exclusive licenses?”
Maddry also notes that you must consider matters such as whether the licensee will be directly competing with your business and whether you want to put in restrictions, such as territorial restrictions, limits on the time frame of the license or limits on the products that will use the patent. Ultimately, he says, you have to “preserve your business and maximize the royalties that you can make from the license.”
For startups, the licensing drive can be even greater than it is for more established companies. “Startups are looking to license their core IP and build the company around it,” says Watson. “Licensing is the centerpiece of what is going on in that space.”
Start me IP
But, while startups are looking to license their IP in much the same way that older, bigger companies are, there are a few major differences that set these newbies apart from their more-established brethren. In fact, IP assets can be even more valuable to these nascent companies than they might be to the big boys.
“Startups are focused on IP as assets that they can use to build their business around and, most importantly, acquire funding for that business,” explains Watson. “Having certain patent rights is going to encourage investors to give you money to develop your business. It's an entry requirement.”
All startups have — or believe they have — great and innovative ideas, but without the proper protection in the space in which they operate, they don't have what investors are looking for, especially for high tech companies, says Watson.
“There's a key role for IP to play in fundraising, whether it is licensed, acquired from a university or developed in house. It's probably difficult for a startup with limited or no funding to develop in-house IP, but once they have money, they’ll begin activities that will produce IP,” she says.
Much of the patent-related attention in the press and in Washington has centered on non-practicing entities (NPEs), those entities that use licensing or litigation to derive revenue from patents without making their own products or services. While so-called patent trolls fit this definition — and are the target of much ire from business owners and Congress — universities also fit into this category. After all, they are not manufacturing goods, though they are generating quite a few patents.
So, with all of these assets and no traditional manufacturing capabilities to help generate revenue, what are universities to do? “When universities are looking at monetizing, there is usually a license that has been successful, leading to a product that is sold and a revenue stream,” Watson explains. Companies often approach universities, interested in a particular patent asset, and the university needs to decide if it would rather license the asset and create an ongoing stream or sell it to generate immediate revenue.
But when the universities have to make decisions about such matters, their decision-making process is quite different from that of a for-profit business. “The university has to look at that financial decision and make it for a number of stakeholders,” says Watson. “In addition to the institution getting revenue, most non-profits share royalty revenue with inventors.” Then, the money that goes to the institution is earmarked for different pockets. For example, a quarter of the funds may go to an inventor group, while another quarter might go the department of the school the inventor came out of. The remaining money might go to a general pool for research education, for example.
“For universities considering monetization, folks that I have talked to have made the decision to go through with it, considering factors like the need for new campus buildings. Sometimes getting money right away can let them do what a royalty stream over time cannot. Schools tend to be more risk-averse,” Watson explains, noting that they often take the money in hand, even if it means getting less overall.
Patents are not the only intellectual property assets that can be monetized, of course. But, if you are thinking of monetizing your trademarks, for example, there are a few things you need to keep in mind. “It's important to know the characteristics of the IP right that you are dealing with.” explains Maddry. “You need to start off with understanding those IP rights.”
He points out that, in this day and age of Big Data, companies have a wealth of information that is valuable to them and to others. These trade secrets and confidential pieces of information can often be the most valuable assets you have, especially as the Alice Corporation Pty. Ltd. v. CLS Bank International has changed the patent landscape in this country.
“The Alice decision introduced a large degree of uncertainty in the validity of IT-related inventions in general,” Maddry explains.
And the future may hold even more changes for companies or other entities wishing to monetize their IP. Congress is considering legislation that would be targeted at the NPE problem, but that might sweep some universities up into its wake. Thankfully, patent-generating universities have lobbyists that work to get Congress to understand the distinction between what universities are doing when they are licensing or assigning their IP. “Universities are identifying, developing and licensing IP for the public benefit; part of that is making products available that improve the human condition. And part of that comes from funds derived from the commercialization of IP, returning that money to education and research. That's a different kind of transaction than an NPE acquiring assets to support litigation or threatening settlements,” says Watson.
Whether they are trying to generate profit or further education, entities understand that their patent assets are more valuable than ever, and monetizing them is the wisest move.