Thursday, 31 December 2015

Does venture capital investment boost patent output?

"Venture capital firms are successful by picking innovative firms, not by boosting their patenting output". This reassuring statement is the opening line of a report released shortly before Christmas by the Cambridge Network. Its key points read as follows:
"The number of patents obtained by technology firms is an often-used benchmark of supposed innovation, and some previous studies have found a positive link between venture capital (VC) investment and patent output.

But a new study at University of Cambridge Judge Business School comes to a very different conclusion: the effect of VC on the patenting output of their portfolio companies is insignificant or negative. While VC firms react to patents in order to identify promising tech companies, VC investment doesn’t boost invested firms’ subsequent technological output [Indeed, there is no logical reason why it should do so]. This suggests that a key role of VC investment is to focus tech firms’ resources on exploiting their existing intellectual property (IP) through commercialisation rather than fresh technological exploration [It may also suggest that VC firms prefer to come in later, once key IP has been identified and recognised as being relevant, viable and protectable, rather than buying in at an earlier stage at which protection and development prospects are less clear].

“VC funds select portfolio companies based on the signalling function of patents,” concludes the study published in the journal Research Policy. “Patenting has much sharper effects on VC investments than the other way around” [This is good news for the patent analytics sector, which can assist VC companies in deciding where, whether and when to invest by focusing on the pattern of patent activity within a potential target sector].

The study reaches its findings through a modelling technique that simultaneously examines three factors: the likelihood of firms attracting VC investment, the likelihood that they patent, and the number of patents applied for and granted. A total of 940 US and UK firms that sought financing formed the final study sample [this impressively large sample adds weight to the study's conclusions]. ....”
While patent-seeking activity is generally agreed to be more intensive in the United States than in the United Kingdom and other European Union countries, it may be that the effect of VC investment on both sides of the Atlantic is to calm the rate of patent application by enabling portfolio companies, now secure in the knowledge that they have attracted investment through their innovation, to narrow their own focus towards creating a return on that investment.

The study, “Venture capital investments and the technological performance of portfolio firms”, is co-authored by Dr Andrea Mina (University Lecturer in Economics of Innovation and Senior Research Fellow, Centre for Business Research, Cambridge Judge Business School) and Henry Lahr (Research Associate at the same Centre and Lecturer in Finance at the Open University Business School). For further information, and access to the study, click here.

Wednesday, 23 December 2015

IP Issues in Corporate Transactions: a book review

IP Issues in Corporate Transactions: a Practical Guide to the Treatment of Intellectual Property in Acquisitions and Investments, is a multi-authored work which has been put together under consulting editor Neil Coulson (Baker Botts).  It is published by Globe Law and Business Ltd, which describe the book's substance thus:
As intellectual property and intangible assets play an increasingly important role in determining company value, it is more important than ever that businesses and their legal advisers are able to identify and understand the key issues surrounding intellectual property when negotiating and implementing corporate transactions.

This book provides comprehensive guidance to the treatment of intellectual property across the full range of corporate transactions, from initial deal preparation, through negotiating points, to post-closure considerations. Chapters cover intellectual property in the context of all types of merger, acquisition and joint venture, with specialist examination of the core IP sectors: telecoms and electronics, life sciences, media and entertainment, and fast-moving consumer goods.

Exploring such allied topics as IP valuation and the relationship between intellectual property and competition law, this guide will be a valuable tool to anyone involved in corporate transactions, of which intellectual property now forms such an integral part.
This is a big challenge for any book of only 200 pages, and it is an even bigger challenge for the reader since, shorn of an index and lacking a detailed list of contents that indicates what topics the reader might find in each chapter, it offers no means of finding the specific information the reader requires other than by reading large quantities of text.  More annoyingly, there is no table of cases, statutes and other legal materials cited. It surely cannot be acceptable to give a professional IP adviser a "valuable tool" that offers no convenient means of search and navigation.

This deficiency is all the more disappointing because the publishers have enlisted the services of some excellent and well-informed contributors, authors whose close familiarity with their allotted subjects and whose ability to communicate their understanding make the reading of the various chapters an informative and often enjoyable experience.  

Another disappointment, though this is something that may be felt more by the authors of this review than by the intended readership, is the relative absence of acknowledgement of the importance of contextualising corporate IP transactions within a world in which the success or failure of a deal may depend on the existence and exercise of third-party rights. Much emphasis is rightly placed on the need to gain a proper appreciation of the IP portfolio of one or (in the case of eg joint ventures) both parties to a transaction, but the big picture in which others hold rights too is given little attention other than in the context of standard-essential patents and FRAND licences.  Since a perfectly-structured and elegantly-executed IP deal can still turn out to be a commercial dodo on account of the positions taken by third parties with regard to their own IP portfolios, a chapter on what IP analytics can deliver would make a great addition to the next edition of this book.

More details of this book, which costs £135, can be obtained from its website here.

Monday, 21 December 2015

Drones: up in the air, but grounded in patent protection

The latest Aistemos IP analytics feature, specially prepared for IAM's weekly industry report, deals with drones. This piece was first published by IAM here last week, and we reproduce it here for the convenience of our readers:
Few words in the English language have enjoyed greater upward mobility this century than 'drone'. Originally defined as a male bee that did no work and lived off the labour of others, the word was borrowed for use in PG Wodehouse’s Jeeves books as the name of a club for male humans who were similarly inclined. But now the drone – more properly termed as unmanned aerial vehicles (UAV) – is a must-have item, whether for military purchasers or for greatly-valued recipients of Christmas gifts. Indeed, it has been predicted that more than one million of these devices will be given as presents during the 2015 festive season, to the consternation of the US Federal Aviation Authority (FAA).
While the majority of patent activity has been in the defence sector, this patent analysis focuses on civilian drones which are put to a variety of commercial uses. Albeit technically similar, military drones are typically aeroplane shaped and operate at high speeds and with heavy loads (eg, ammunition), while civilian drones are typically 'quadricopters' that are light and can carry a small package or camera. Figure 1 shows that while the military market was developing drones before there was any appreciable scope for their commercial exploitation, by 2024 the civilian market will have gained substantial momentum, growing at a proportionately faster rate than the military one.
Source: Teal Group, Business Insider
Turning to Figure 2, our Cipher analysis of the broader UAV technology landscape shows that of the top 30 patent holders, no fewer than 18 (or 60%) are involved in the military drone area.
Unsurprisingly, the large aeronautical companies have a rich heritage in aviation and large portfolios covering various aspects of commercial flight; however, civilian drones also incorporate technologies that might not be core to them. Figure 3 puts this in perspective by comparing civilian drone manufacturers with large aviation companies, within the area of commercial drones. The largest three with strong growth since 2009 are Honeywell, Airbus and Boeing. With the exception of Parrot SA, there is a clear gap in terms of the number of granted patents between military and civilian drone manufacturers; however, there is rapid growth among the civilian drone companies.
Exploring the civilian drone sector, which businesses are its current lead players? Among recent filings, Chinese company DJI is ahead of the pack in terms of growth, followed by French company Parrot and Berkeley-based 3D Robotics. Other leading drone makers are Hubsan (China), Hobbico (United States), Yuneec (China) and Xaircraft (China).
Only one of these companies has been around for some time – Hobbico, which made radio-controlled hobby products in the 1970s. The others are far more recent. Parrot SA dates back to 1998 and Yuneec to 1999. Patent-rich DJI was founded in 2006, Xaircraft began its operations in 2007, 3D Robotics started up in 2009 and Hubsan, the most recent, has been in business only since 2010.
DJI, Parrot and 3D Robotics – arguably the top three civilian drone manufacturers – could not pursue more different patenting strategies.
DJI is the market leader. Its powerful position in the market is shown by the fact that it holds more than two-thirds of the 700-plus exemptions from regulation granted by the FAA under Section 333 of the FAA Modernisation and Reform Act 2012. According to a Summer 2015 report in Fortune, the company owned more than half of the global market for what it called “consumer-focused drones”. Its global control of the market may not be as great as its slice of the market suggests. The intensive patent application activity shown since its launch is reflected almost entirely in its Chinese filings. Interestingly, its fellow Chinese drone companies are not as purely focused on China.
Parrot, on the other hand, already had a wider patent strategy in place when DJI started up, and its filing activity – which peaked in 2006, DJI’s birth year – is reflected by the company’s ownership of some of the earliest patents in the industry.
3D Robotics might be described as travelling light, with just two patent families to its name. This suggests that the company is taking the opposite approach to DJI’s patent-heavy strategy, betting on the sector benefiting from third-party development of open software and architecture that will enable both it and its competitors to use these open platforms as a basis on which to build their own value-added software and hardware. This is corroborated by a quote from Fortune that “3DR likes to analogize Solo with the smartphone, which didn’t really take off until third parties were able to develop an ecosystem of apps around the hardware”.
The spread of patents shown in Figure 5 demonstrates that there is far more patent filing activity by competitors in the United States than elsewhere in the world. This strongly suggests that if there is to be any industry-defining make-or-break patent infringement or invalidity litigation, it will be before US courts. In fact, in July this year Parrot lost a case for its app-based control of drones to Taiwanese company Drone Technologies and had to pay $1.7 million.
This sector is too new and too dynamic to draw firm conclusions as to how it will develop. However, it does provide an opportunity for patent analytics to depict the action as it happens, where it happens. Given the buoyant growth of the market for drones, the one firm prediction that can be made is that it will provide a fertile ground for further analysis as the sector matures.

Thursday, 17 December 2015

Trade secrets: a round-up of key issues

Recent Aistemos blogposts here, here and here have discussed or touched upon that most intangible of intangible intellectual property rights -- the trade secret.  We now welcome a guest post by former Nokia VP for R&D and Director of IP Donal O'Connell, currently an Aistemos consultant, on the main points to bear in mind when facing trade secrecy issues.  Donal is planning to launch a trade secret management tool in the first half of next year, so do contact him (you can email him here) if you have any comments or suggestions, or just want to be kept informed. 

Here is Donal's piece on trade secrets:
Trade secrets
A trade secret is a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information which is not generally known or reasonably ascertainable by others, and by which a business can obtain an economic advantage over competitors or customers. The scope of trade secrets is virtually unlimited. A trade secret is therefore defined as any information that 

  • is not generally known to the relevant business circles or to the public. The information should also not be readily accessible.
  • confers some sort of economic benefit on its owner. This benefit must derive specifically from the fact that it is not generally known, and not just from the value of the information itself. It must have commercial value because it is a secret. Commercial value encompasses potential as well as actual value.
  • must have been subject to reasonable steps by the rightful holder of the information to keep it secret. What is reasonable can vary depending on the specific circumstances.
A trade secret continues for as long as the information is maintained as a trade secret. However, information may no longer be considered to be a trade secret once it becomes easily accessible, is no longer properly protected or has no commercial value. 
Trade secrets can be one of the most important assets in an organization’s IP portfolio. They are at least on a par with other forms of IP such as patents and trade marks. Some would argue that they are the crown jewels of any IP portfolio. 
Trade secrets v confidential information 
Broadly speaking, any confidential business information which provides an enterprise a competitive edge may be considered a trade secret. But not all confidential information within an organization qualifies as a trade secret. 
Within an organization, there may have multiple levels of confidential information, with trade secrets being at the highest level of confidential information. A distinction should be drawn between widely accessible (internal) confidential information and trade secrets which require special governance. This means that the normal processes to manage confidential information may not be considered adequate for managing trade secrets.Although the terms confidential information and trade secrets as well as proprietary information and even know-how are often used interchangeably, these terms are interpreted differently and the remedies for the unauthorized revelation of such information may also differ.  Thus, despite there being a substantial overlap between trade secrets and confidential information, they are in fact different things. 
The law on trade secrets 
Generally, any confidential business information which provides a business with a competitive edge may be considered as a trade secret. The unauthorized use of such information by persons other than the holder is regarded as an unfair practice and a violation of the trade secret. 
Depending on the jurisdiction, the protection of trade secrets forms part of the general concept of protection against unfair competition or is based on specific provisions or case law on the protection of confidential information. 
A trade secret is a valuable piece of information for an enterprise that is treated as confidential and gives that enterprise a competitive advantage. Since European companies are increasingly exposed to the misappropriation of trade secrets, the European Commission is working to harmonize currently divergent national laws on the protection against the misappropriation of trade secrets so that companies can exploit and share their trade secrets with privileged business partners across the EU, turning their innovative ideas into growth and jobs. 
In the United States there is already a unified trade secrets law, the Uniform Trade Secrets Act (UTSA). While trade secret law is predominantly governed by state law, every state except Massachusetts and New York has adopted some version of the UTSA. Its language, and that of the state statutes that have adopted it, is very similar to the language in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), this being an international agreement administered by the World Trade Organization (WTO) that sets down minimum standards for many forms of IP regulation as applied to nationals of other WTO Members. 
The US may be about to strengthen its trade secret law. The Defend Trade Secrets Act of 2015 (DTSA), for which identical bills were proposed with bipartisan support in both the House and Senate in July 2015, would significantly enhance US federal protections to curb trade secret theft and secure the value of trade secrets. 
There are also two major US federal laws that govern certain aspects of trade secrets.  The Computer Fraud and Abuse Act is the federal statute governing computer hacking. The Economic Espionage Act targets industrial espionage. 
Shortly after the start of the 2014 Chinese New Year, China’s State Administration for Industry and Commerce (SAIC) announced the opening of a discussion regarding a revision of its 1993 Anti-Unfair Competition Law (AUCL). Since the AUCL includes provisions governing trade secret misappropriation, the upcoming revision may bring important changes to the current regulatory and statutory channels for the protection of trade secrets in China. 
Regardless of the jurisdiction, clearly unfair practices in respect of trade secret include industrial or commercial espionage, breach of contract and breach of confidence. However it is not misappropriation of a trade secret to discover the secret information independently, or to reverse-engineer it from a properly obtained source. 
Legal protection is not sufficient 
Depending on this form of legal protection of trade secrets alone is not sufficient. Organizations possessing trade secrets need to take reasonable efforts to protect these assets, such as via some administrative and technical measures. 
Administrative measures may include having robust trade secret policies and procedures in place. At a minimum, a reasonable policy should require that a company identify trade secret material as just that, with a big ‘Trade Secret’ stamp on the document itself. Then limit the number of people who have access to the trade secret. Educate the employees about the trade secret policy of the organization. Insist that employees with access to trade secrets sign a confidentiality, or nondisclosure, agreement. 
Technical measures may include various access control and security measures to make it difficult for the trade secrets to be stolen. With the increase in cybersecurity threats, hacking, electronic espionage, malware, etc. trade secrets that are stored in electronic format must be properly protected. 
Various reports indicate that organizations are increasingly vulnerable to theft of trade secrets, whether due to activities by current or former employees, from corporate espionage or from hackers or cyber criminals. It is therefore crucial that organizations take reasonable steps using both administrative as well as technical measures to protect their trade secrets. 
The subject matter of trade secrets 
The subject matter of trade secrets is usually defined in broad terms and includes sales methods, distribution methods, consumer profiles, marketing plans, supplier lists, client details, and manufacturing processes. Trade secrets may encompass manufacturing or industrial secrets and commercial secrets. 
Perhaps the most famous trade secret is the Coca-Cola formula reputedly stored in a vault in the city of Atlanta. Google’s proprietary search algorithm; KFC’s blend of eleven herbs and spices; the compound WD-40, that distinctive spray with thousands of uses, are other famous examples of trade secrets. 
Trade secrets can even protect negative know-how, for example the results of failed experiments. 
A final determination of what information constitutes a trade secret will depend on the circumstances of each individual case, but it is clear that the subject matter is very broad indeed. 
Trade secrets often protect valuable information that cannot be protected under other forms of intellectual property law. 
Advantages of trade secrets 
There are many forms of IP. The advantages of trade secret protection are as follows:
  • Trade secrets involve no registration costs. Obviously there may be costs associated with the administrative, technical and/or legal barriers the company puts in place to protect its trade secrets.
  • Trade secret protection does not require disclosure or registration, unlike for example a patent which becomes public information
  • Trade secret protection is not limited in time, unlike for example a patent which only lasts for twenty years;
  • Trade secrets have immediate effect, unlike for example a patent which may take a few years to be granted.
Trade secret managementIt varies greatly from one company to another how they actually manage their trade secrets. Good practice however suggests the following actions:
  • Assign ownership of trade secret management process to someone senior in the organization.
  • Have a trade secret policy and associated procedures in place.
  • Utilize confidentiality agreements as these play an important role in protecting trade secrets.
  • Have an awareness and education program to ensure that all employees are aware of this trade secret policy and associated procedures. This can be included within a broader intellectual property awareness and education program.
  • Determine which types of information should be deemed as trade secrets within the organization, and the qualifying criteria.
  • Identify all of the trade secrets across the organization and mark these documents in the proper and professional manner. This inventory of trade secrets may change over time as new trade secrets are identified and some older trade secrets no longer warrant being treated as such.
  • Classify these trade secrets in terms of the nature of the secret, the date created, responsible person(s), etc. plus the value of the trade secret to the business.
  • Determine the administrative, technical and legal measures that are needed to properly protect each trade secrets. The exact measures may differ from one trade secret to another.
  • Ensure fit for purpose access control measures are in place.
  • Ensure IP issues in general and trade secret issues specifically are addressed in both entry interviews of new employees and exit interviews of departing employees.
  • Develop contract provisions and working mechanisms in relationships with outside business partners, including joint venture partners, to protect trade secrets.
  • Conduct regular trade secret audits.
Trade secret management process & system 
Trade secrets are valuable assets for any business, possibly among the most important that it possesses.  It is therefore imperative that whatever trade secret management process is taken into use is fit for purpose, and add some value to those using the process. Whatever trade secret management system or tool taken into use should properly underpin the processes, and the process, system and associated data all need to be synchronized. 
A process can be seen as an agreement to do certain things in a certain way and, the larger the organization, the greater the need for agreements on ways of working. Processes are the memory of the organization, and without them a lot of effort can be wasted by starting every procedure and process from scratch each time and possibly repeating the same mistakes. 
A first-class trade secret process facilitates good communication between the information originator and the information receiver, because they help to set and manage expectations and the consistency of the information being given. 
The trade secret process defines what and how tasks are done and by whom, to ensure repeatability. This is especially important as a trade secret may originate in one part of the organization but be utilized elsewhere in the organization or even externally. The trade secret process also enable an organization to set performance criteria and measurement, which can be utilized when identifying the source or root-cause of any problems. 
The trade secret process must never be allowed to become static, because it is there to serve the organization and not vice versa. Ways and means to take identified improvements systematically into use should exist within the organization and well-established processes can be used as a tool to accomplish this aim. 
If the organization only has a handful of trade secrets to manage, then it is possible to live with some handcrafted approach. However, once the number of trade secrets increases, then it is best to put a trade secret management system in place to underpin the process. Such a software system helps ensure that the company is managing its trade secrets in an efficient and effective manner. Such a system can help to manage the trade secret management process, even if the trade secrets themselves are captured in non-electronic format. 
Trade secret audits 
You typically get what you measure. It is therefore crucial that there are regular audits conducted. It is strongly recommended that regular audits of the trade secrets policy and procedures are conducted as well as of the trade secrets themselves and the associated protection measures in place. 
Companies generally gain tremendous value by taking a proactive, systematic approach to assessing their trade secret assets, trade secret policy and associated procedures through regular audits. A proper trade secret audit should involve people with business, technical and legal skills and competencies, knowledge and experience, given the unique nature of trade secrets. 
The findings of these regular trade secret audits should be reported to and discussed with senior management in the organization. 
Not an island 
It is indeed possible to maintain a trade secret yet share it with others, so long as this sharing is well managed and the trade secret is not dispersed broadly. In today’s business environment, valuable business information must be shared with employees across diverse organization functions, plus externally with key suppliers and customers as well as with other collaboration partners. Technology transfer licenses, joint venture agreements and other contractual arrangements can provide for trade secrets to be assigned or shared on a limited basis. 
It is also important to realize that the trade secret management process is not an isolated process, disconnected from other processes or activities across the organization. Good trade secret management means having a good understanding and appreciation of the links with other organizational functions and their key processes or procedures.Some of the links worth considering are:
  • Human resources, given their role with employees.
  • Sourcing & procurement, given their role with key suppliers.
  • Technology licensing, given their role with key collaborative innovation partners.
  • Research & development, given that many trade secrets originate here.
  • Document management, for example the technical document management process of the organization.
  • Legal, given the legal underpinning of trade secrets.
  • IP, given that the organization’s trade secret activities and patenting activities should be in sync.
  • IT, given that many trade secrets are now in digital form and various technical solutions must be deployed to protect such trade secrets from theft by for example hackers.
  • Finance, given that these trade secrets are valuable assets and impact the financial performance of the business, now or in the future.
  • Facilities, given their responsibilities for the physical buildings occupied by the organization, and such issues as access and security.
  • Corporate communications, as some organizations may wish to advertise and promote the fact that they possess important trade secrets.
Final thoughts 
Trade secrets are an important, but an invisible component of a company's IP portfolio of assets. They can add tremendous business value, so they need to be properly and professionally managed, and looked after. 
Trade secrets should be on the agenda of any in-house IP function as well as on the agenda of any Legal or IP Firm advising organizations. As stated earlier, trade secret legislation is likely to strengthen in key jurisdictions, at a time when patents seem to be weakening in some locations. 
Trade secrets can be the crown jewels in an organization’s intellectual property portfolio. As listed earlier, they possess some clear advantages over other forms of IP. However, trade secrets only work if managed properly and they are well looked after. 
Trade secrets also have some disadvantages which need to be properly understood. It is not misappropriation of a trade secret to independently discover the secret information, or to reverse engineer it from a properly obtained source. An organization should therefore take a broad holistic approach to IP and consider how to leverage all of the different forms that exist, such as trade secrets, patents, publications, etc. as each form has different pros and cons. 
Proper and professional trade secret management requires a thorough understanding of this particular form of IP, a fit for purpose trade secret management process underpinned by a robust trade secret management system, plus a good governance process together with regular trade secret audits. 
Trade secrets are fragile and therefore require some TLC.

Tuesday, 15 December 2015

Aistemos LinkedIn discussions: two recent additions

The Aistemos LinkedIn Group, which now has over 280 members, has started a couple more discussion topics since we last drew the attention of our readers to it a little over a month ago.  Our most recent topics look like this:
* The Aistemos blog earlier published an item on trade secrets, these being intangible IP assets which pose a huge challenge in terms of integrating them into the methodology of IP analytics. We had hoped for some bright ideas from readers but, in their absence, we are putting down a marker on this LinkedIn discussion page so that we can return to it from time to time and review the situation. Meanwhile, your thoughts and perspectives are always appreciated [update: Aistemos has since posted two further items on trade secrecy, here and here, and will shortly be posting a further one on trade secrets management issues]

* What, if anything, do the terms "disruptive innovation" and "disruptive technology" mean? Our earlier blogpost here had attracted some interesting comments from readers, so we thought it would be good to pass these questions to our friends and colleagues in this LinkedIn Group to ask whether these terms are useful analytical terms or have become little more than soundbites and thetorical slogans. Your views are much appreciated.
The Aistemos LinkedIn Group is a serious and responsibly moderated LinkedIn Group which welcomes discussion and debate. Do join and feel welcome to share your thoughts and opinions with us.

Monday, 14 December 2015

Patent litigation insurance: new tools for the job

"Intellectual property insurance is evolving". That's not merely an opinion -- even though it's the title of an opinion piece published in Insurance Day. It's part of the reality of the world in which businesses seek to shift risk as they invest in new products and processes, a world in which the insurance sector is finally being equipped with the informational tools it needs if it's going to provide a realistically affordable service for those innovating businesses.

The author of this piece, Erik Alsegård (CFC Underwriting), explains that data analytics lies at the heart of IP infringement insurance’s move from niche product into the mainstream, deriving support from Aistemos CEO Nigel Swycher. He writes:
Swycher points out there are more than 250,000 SMEs that are exposed to IP risk in the US. “If they are sued it could cost them $1m and potentially put them out of business. However, spread across all SMEs, the risk is less than a household burglary – and who doesn’t insure against that? This looks like a gold mine for anyone willing to engage with the data.”

Moving IP insurance from a niche class of tailored policies to a volume solution for thousands of companies also relies on efcient underwriting which, in turn, builds a good reputation by ofering high service levels. Again, the availability of data analytics with suitable interfaces can assist in creating a streamlined underwriting process.
You can read the article in full by clicking here.

Thursday, 10 December 2015

What we know and what we don’t: a review of patents for cybersecurity

"What we know and what we don’t: a review of patents for cybersecurity" is the title of this week's Aistemos IP Analytics contribution to the IAM Weekly Industry Reports.  This report gives a breakdown of one of the most currently sensitive industry sectors, offering not just fresh data but some pertinent perspectives.  This is what we've written:
The advantages that can be derived from the illicit accessing of both commercial and technical information, and the damage that can be done, are unimaginably large. In consequence, following recent incidents such as the hackings of the extramarital affairs of Ashley Madison patrons and the TalkTalk telephone subscriber database, not to mention concerns over systematic technospying by China and other nations, public concern over online information security breaches is running at an all-time high. While these anxieties are real, it may well be that the highest level of concern should be reserved for the episodes of hacking which are so sophisticated that they have achieved their aims without ever being detected at all.
With national security, commercial hegemony and personal dignity at stake, it is unsurprising that both public and private sector clients are prepared to pay a premium for the peace of mind that cybersecurity can bring. This in turn incentivises market entrants, of which there are three basic types:
  • major players in the field of computer hardware, software and cloud services (eg, IBM, Intel and EMC Corporation) which have augmented their other products with a range of cybersecurity offerings;
  • security companies which operate generally throughout the field of computer security (eg, Symantec and Japanese player Trend Micro); and
  • 'pure play' companies (eg, Fortinet and Riverbed) which focus primarily on cybersecurity.
The first two of these groups tend to have a broad range of patents while, as might be expected, pure play operations are generally smaller and hold correspondingly fewer patents. The first group is also far more deeply rooted in the computer services market. IBM, Intel and EMC Corporation were founded in 1911, 1968 and 1986, respectively – long before cybersecurity was an issue.
The second group’s members are more recent. Symantec’s involvement in security followed its acquisition of the Norton business in 1990, and most of the pure play companies are relative latecomers to cybersecurity. Fortinet dates back to 2000 and Riverbed to 2002, while Trend Micro, a veteran in the field, moved from hardware dongles to anti-virus products back in 1992. On the other hand, the pure play companies have been making up for lost time: the three mentioned here have increased the size of their patent portfolios between five and 10 times. 
Figure 1 shows the vast difference in size and growth of this space. The major computer companies hold thousands of relevant patents but, while they also continue to grow, their rate of growth in relative terms is not as dramatic as that of companies such as Qihoo and Fireye, which have grown by hundreds of percent since 2013. However, it also shows that IBM’s portfolio of granted patents is tens of hundred times larger than many players and nearly twice the size of the combined substantial holdings of Intel and EMC. Knowing their successful licensing operations, they should be, perhaps unsurprisingly, a real IP powerhouse in this space.
Figure 2 focuses on the number of new filings in the space over the last three years, where IBM’s dominance is seen again, but Symantec, Qihoo and Fortinet are also making strides.
In Figure 3 the metrics of filings and size are combined, but only for security and pure play companies. Here the strong growth of Symantec can really be seen.
How does cybersecurity pan out in terms of global spread? Recent Cipher studies have shown that patenting in some technology sectors is relatively evenly spread internationally (eg, the automotive sector), while in other cases patent filing is dominated by a single jurisdiction (eg, aquaculture, where China has taken the lead, and brewing, where Japan’s strong position is in the process of being overhauled by foreign challengers) or by dominant regions (eg, FinTech, where the preponderant patenting activity is US and Asia-based). When it comes to cybersecurity the picture reflected in Figure 4 is again one of an extreme US focus, although $1.4 billion-capitalised Chinese company Qihoo is patenting extensively in China and the Moscow-based core of Kaspersky, which operates in nearly 200 countries, files some patents in its Russian home territory. One anomaly is that Trend Micro, compared to many other Japanese companies, focuses primarily on the US market.
Unlike some of the other sectors mentioned above, cybersecurity is the one in which non-practising entities (NPEs) appear to have a substantial, if small, presence. This is demonstrated in the table below, which shows defensive aggregator RPX ahead of patent chimera Intellectual Ventures and Acacia.
As might be guessed from the corporate bases of these operations and the prevalence of NPE rent-collecting practices in the United States, cybersecurity patenting by businesses that are not delivering commercial products themselves is predominantly a US affair. Figure 5 shows small but comparable levels of patenting by NPEs in Europe and Asia, and very little beyond.
Figure 6 looks at the litigation intensity in the space, where it is clear to see how active an IP area this is, with a substantial number of NPE suits (75% of total). However, it is also hotly contested, with a large number of competitors suing each other (eg, Fortinet and Trend Micro).
Where then does this leave customers? The large volume of patents and intensity of filing activity suggests that the patent system is responding to a rich and anxious market by producing a large number of innovations which, ideally, should result in a wide range of sophisticated products. 
However, there is a downside to the patent system here. A condition of receiving a patent grant is that the invention is clearly and fully described in the patent application. This information is publicly available and there is nothing to stop cybercriminals accessing and studying it. It may well be, therefore, that businesses will want to consider an alternative strategy based not on patenting but on confidentiality. If this is done, the new products will be as invisible to the world as those successful cyber attacks that have yet to be detected.

Wednesday, 9 December 2015

IP due diligence: one problem, four perspectives

"IP Due Diligence -- Making a Difference" was the title of a roundtable discussion hosted by Aistemos last Thursday under the Chatham House Rule.  Input reflected the views of the financial services sector, business, the legal profession and IP analytics. By all accounts the discussion was a lively one, from which a number of themes emerged (on a non-attributable basis), to which this weblog has added some comments:
Finance: Participants from the world of finance indicated that investment banks rely on conventional financial metrics. While there is general recognition that intangibles account for 70% of enterprise value, there is a level of ignorance about IP as an asset class [the "70%" figure is a great starting point for discussion. While the figure may have some validity when spread across enterprises as a whole, it will differ radically as between different sectors and between different enterprises in the same sector. Those intangibles may be renewable or non-renewable registered rights, unregistered rights or amorphous rights like trade secrets. Worse, the IP rights may actually be owned by others and enjoyed only by way of a licence.  Given this reality, one can question whether the 70% figure is of any genuine use]; 
Corporate: From a corporate perspective it was recognised that IP is increasingly important in a broad range of corporate transactions, and it is essential to focus on what matters: this is rarely a question of valuing a single piece of IP, but rather is a matter of addressing its importance to the deal as a whole [the contextualising of IP rights within a corporate business plan or an ever-changing market cannot be underestimated: while IP rights were conceived at a time when the paradigm was one IP right per product or process, this is rarely the case today] 
Lawyers: The lawyers participating in the discussion pointed out that the contractual matrix (e.g. assignment, exclusive or non-exclusive licence or pooled rights) is an important part of the picture. Clients appreciate the external team’s ability to see the deal as a whole [where the remit of the external team includes non-IP issues such as tax-efficiency or possible antitrust and competition problems, clients may be asked to keep many different considerations in mind at the same time -- this can be a problem when time is pressing or when the external team struggle to appreciate the issues relating to each others' professional disciplines]. 
Analytics: Analytics experts observed that, while financial markets are familiar with S&P-style indexes to rate the general state of affairs, an appreciation of the function of IP rights within a business would benefit from better ways of communicating relevant risk- and value-drivers [but that people who are familiar with the traditional indexes and who have learned to operate successfully in reliance on them need some persuading that further data -- however well it is communicated to them -- will deliver that benefit].
A measure of consensus was also achieved across a range of topics. In particular:
* More attention is now being devoted to IP across a wider range of transactions than was previously the case;
* Sector-specific approaches to IP are fundamental (e.g. pharma/biotech has characteristics that are not found in other sectors);
* Since both time-scales and budgets for completing transactions are tight, trusted advisers are highly valued;
* There is still some way to go before IP issues will be recognised and taken into account as part of the deal-making process;
* The financial services sector can derive benefit from gaining a greater degree of familiarity with IP issues and trends.
Readers are invited to offer their thoughts on the points made above.  Have the participants got it right? Do let us know what you think.

Monday, 7 December 2015

Unicorn or donkey? It's time to separate the myth from the meaningful in IP valuations

Plenty of these around!
"Unicorn or donkey? Investors need to forget mythical valuations and look at intangible assets to spot a good startup" runs the title of Aistemos CEO Nigel Swycher's opinion piece in today's CITY.AM.  The message is plain: investors need to base their decisions on data rather than hope when looking at tech companies.  Says Nigel:
Unicorns are extremely rare, magical creatures. At least they were. Until a few years ago, when “unicorn” became shorthand for a handful of mainly US venture capital-backed companies with pre-IPO valuations of $1bn or more.

Today, depending on how you define them, there are about 150 unicorns out there – among them household names like Dropbox, Snapchat and Airbnb.

Many of them are celebrated for their disruptive business models - the taxi company that doesn’t own cars, the travel company that doesn’t own hotels and so on – but is this really cause for celebration, or does it expose a fundamental issue with mythical beasts?

That is, if unicorn valuations are not supported by conventional financial metrics (most unicorns do not make a profit) or conventional asset valuations (most don’t own substantive fixed assets), how do we know that they are accurate?

That leads to more questions. If the valuations that “define” unicorns in the first place are less than solid, do unicorns really exist?’

On that front there is bad news and good news.

The bad news is that the valuations are not real in the sense that no one has ever bought the company for that amount. In truth, they are based on strangled maths, which typically extrapolates from venture capital investment rounds. 

If a company sells 10 per cent of its shares for $100m it’s worth $1bn, right? Wrong. The investor is likely to have a preference such that their money (plus a return) is the first money out. So from that perspective, the investor only needs the company to be worth more than $100m to make a return, but does need the hype and hyperbole associated with unicorn status to help the company on its way.

The good news is that all unicorns have one thing in common: Innovation. They typically spot an application for technology that creates an opportunity to scale at a rate that would otherwise be impossible. This inevitably means that a unicorn’s value depends to a large extent on the quality of its intangible assets.

Don’t be alarmed. These are not mysterious superpowers, just an asset class that has remained hidden from view for too long.

Intangible assets include intellectual property (IP) rights, such as patents and brands. They are very real and often determine whether a unicorn has staying power or will drown in the flood of competition that inevitably follows early success.
But these are rare

Crucially, this reality presents a real opportunity for investors willing to study the true anatomy of unicorns. Until recently that has been hard, because the quality and accessibility of IP data and analytics has simply not matched financial data sources such as Thomson Reuters and Bloomberg. Not any more. We live in an era of big data. Take a look at patents, litigation and licensing activity. Strip away the mythical valuations - and you can see the intangible assets that the company is really made of.

If there really is nothing there then perhaps you’re looking at a donkey, not a unicorn.
For other Aistemos posts that discuss unicorns click here ("Unicorns: what are they -- and why we should care", 7 September) and here ("Tops and bottoms are fine, but what about the middle?", 24 September).

Changing of the Guard as CPA, LexisNexis mop up analytics firms

"Changing of the Guard in the Patent Information Market", an informative and thoughtful piece by Hugh Logue, was posted on Outsell Insight last Wednesday.  Seeing the words "changing guard" and "patent", the literary reader might supply the linking concept, this being the word "Alice", recalling the opening stanza of A. A. Milne's famous verse 
"They're changing guard at Buckingham Palace.
Christopher Robin went down with Alice"
and remembering that the US Supreme Court ruling in Alice Corp v CLS Bank International has had more impact on the IP world than almost any other legal decision.  But this is no children's rhyme. Hugh Logue's article goes right to the heart of the role of patent analytics today and its prospects for the future.  In relevant part it reads like this, with emphases added in bold red text:
As Thomson Reuters exits stage left from the IP information scene, LexisNexis and CPA Global expand by acquiring two innovative software-as-service providers.

... Following Thomson Reuters' major announcement on 11 November that it is seeking potential buyers for its IP & Science Business, leading patent service and information providers CPA Global and LexisNexis have both announced they are acquiring innovative IP startups ....

Now with CPA Global
CPA Global, a provider of IP management software solutions and outsourced legal services, announced the acquisition of US-based IP search and analytics software provider Innography.  
This is CPA's fourth recent major acquisition of an IP solution provider; in 2013, it acquired First To File, a Silicon Valley-based developer of electronic document management systems specifically tailored for the IP industry. In 2014, it acquired Patrafee, a leading Nordic IP services provider, and patent search and analytics service provider Landon IP. CPA was itself acquired by private equity firm Cinven in 2012 ...

The acquisition of Innography will strengthen CPA's technology and analytics capabilities, and accelerate CPA's shift from manual services to an information as a service provider. ...

Meanwhile, LexisNexis has acquired Lex Machina, a Silicon Valley-based startup that provides legal professionals with a predictive analytics platform to use for intellectual property litigation. ...

Implications: Outsell estimated in 2014 that Thomson Reuters' patent-related revenues amounted to $360m, while LexisNexis' and CPA Global's revenues amounted to $60m and $14m, respectively. As Thomson Reuters' IP & Science business goes through the transition of being divested, LexisNexis and CPA Global have the opportunity to use any resulting brand and product confusion to grow their market shares. The acquisitions of Lex Machina and Innography will accelerate this, not least because of their existing customer base of top law firms and major corporations. The CPA deal underlines the continued threat to information providers from the growing trend among professional service companies expanding into the information market ...

LexisNexis clearly believes that the combination of its content and capabilities with Lex Machina's predictive analytics technology will enable it to build an array of new legal analytics solutions across different practice areas. In Outsell's opinion, there is huge potential for predictive analytics within the legal information space, and patent solution providers have been at the forefront of innovation in this area .... 

... What is certain is that we are at the dawn of a new generation of IP information providers in which big data predictive analytics solutions, with rich data visualization tools that serve both core and adjacent markets, will prevail.
This recent swathe of transactions leaves Aistemos -- a relative newcomer in the field, having celebrated its second birthday just a few weeks ago -- as the only independent IP analytics company left standing.  What will this mean for the sector? Will its growth attract new entrants or will the battling giants make the terrain too inhospitable for them as they seek to exploit the profit potential of their recent acquisitions? We await further developments with interest.