One way to conceptually distinguish the assertion model from the business
opportunity model is that the former deals with patents as a legally
enforceable exclusionary right while the latter deals
with patents as a commercially
tradable asset class.
By Ron Laurie
opportunity model is that the former deals with patents as a legally
enforceable exclusionary right while the latter deals
with patents as a commercially
tradable asset class.
By Ron Laurie
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| White Paper: Business Opportunity Alternatives to Assertion-Based Patent Monetization |
The commercial value of a patent derives from the fact that it confers upon its owner a legally enforceable
exclusionary right, i.e., the right to exclude others from operating within the product or process space defined
by the patent claims. A patent that current and prospective infringers know will never be asserted against
them has zero economic value. Thus, a patent implicitly carries with it the potentiality, i.e., the threat, of
assertion, and the value of the patent ultimately reflects the collective commercial risk that potential
infringement litigation targets assign to that threat. On the other hand, patent assertion as a monetization
model implies something more. Typically, the assertion entity has no other business and thus is not
vulnerable to counterclaims for infringement of its targets’ patents. It says to the target, “We have a patent that
covers what you are doing. Pay us a royalty or we will sue you.” The assertion model is essentially a zero-
sum game, and the pejorative moniker “patent trolls” has come into vogue
as a way to describe those who exploit this model, although there is
considerable controversy surrounding what attributes distinguish a troll
from a legitimate patent enforcer. The value proposition for the troll’s target
is either to pay for a nonexclusive license (or covenant not to sue), or to
contest infringement and/or validity of the patent in court and risk a
damages award in the form of a reasonable royalty (which may be trebled
for willful infringement) — or worse, the possibility of an injunction.
In contrast to the assertion model, the business opportunity model of patent monetization is premised on a
win-win value proposition, and takes many forms. These include: a) an outright sale of the patent, with or
without a continuing economic interest; b) one or more exclusive field-of-use licenses in selected vertical
markets or discrete commercial applications; c) nonexclusive licenses coupled with technology (know-how)
transfer; d) corporate transactions involving the sale or merger of entire companies or the spin-out of
divisions, business units, or technologies; and e) various investment and financing vehicles.
OUTRIGHT SALE OF THE PATENT
The simplest monetization alternative is an outright sale of the patent. The buyer could be a company that is
already operating in the technology space represented by the patent or one that is about to enter the field, or,
with increasing frequency, the buyer may be an institutional patent aggregator. The former group may be
characterized as strategic buyers and the latter as financial buyers. The purchase price can be a lump sum,
either in cash, stock, or a combination of the two, or it can involve a continuing revenue stream (a “tail”) based
on performance. In the latter case, the seller will usually retain a reversionary interest in the patent(s) such
that if certain financial milestones are not met, ownership reverts to the seller.
If the seller is an operating company, sale of a patent may also involve retention of some rights under the
patent by the seller via a reservation of rights or a grant-back license. The grant-back may be nonexclusive or,
if the buyer and seller are in different fields (and the patent covers both), an exclusive license within the field
of the seller’s business. In either case, issues as to whether the grant-back license: a) includes sub-license
rights; b) covers follow-on or improvement patents granted to the buyer; and/or c) survives change of control
of the seller/licensee are important, are often contentious, and can be the subject of substantial negotiation.
EXCLUSIVE FIELD-OF-USE LICENSES
Another business opportunity model involves the granting of one or more exclusive field-of-use licenses, one
of the most valuable and versatile tools available to patent owners. For example, assume that the patent(s)
cover not only the patent owner’s products and markets but other applications as well. The patent owner
could grant a third party an exclusive field-of-use license for all fields outside the owner’s business. A well-
known variant of this approach is for the patent owner to define “core” versus “non-core” applications of its
patents to its business and grant nonexclusive licenses to others for the non-core applications. Alternatively,
instead of granting a single exclusive field-of-use license, the patent owner can define a number of non-
overlapping applications of the patent, sometimes called “verticals,” and grant an exclusive license within
each vertical to a different party. Finally, to the extent that several parties are in different businesses and they
each have patents covering both their business and the business of the other part(ies), they can enter into
exclusive field-of-use cross-licenses, whereby each party aggregates an exclusionary position in its field of
interest. This can be particularly effective in creating contractual joint ventures. One thing that must be borne
in mind when creating any exclusive field-of-use licensing program is to ensure that the licensee has full
enforcement rights within its field (the standing issue) and that the patent owner agrees to join in any
enforcement action (the joinder issue).
NONEXCLUSIVE LICENSE AND TRANSFER OF KNOW-HOW
While “bare” nonexclusive licenses (or covenants not to sue) are one of the identifying attributes of the patent
assertion model discussed above, there is a form of nonexclusive license that falls within the business
opportunity model, namely a nonexclusive license coupled with the transfer of know-how, technical support,
etc. This is generally referred to as a technology license and represents the difference between “stick”
licenses (the assertion model) and “carrot” licenses (the business opportunity model). A number of “IP
companies,” such as Rambus, Tessera, Interdigital MIPS, and ARM, have been formed, or have evolved,
around this model. Typically, the company has three operating units: R&D, IP licensing, and customer
support. The only “product” in the conventional sense is the technology that is transferred to the customer,
which may take the form of digital design data, such as microprocessor cores or cell libraries. The customer
support activity assists the customer in integrating the technology into its products or processes. Patent
monetization may also occur in the larger context of a corporate transaction such as a sale or acquisition of a
company, divestiture of a business unit, or merger of two companies.
CORPORATE TRANSACTIONS
The sale of a technology company whose corporate value or market cap is largely represented by “intangible
assets” is, to some extent, a patent monetization transaction. The consideration for the sale can be all cash,
all stock, or a combination of the two. The sale can occur via an asset sale, stock sale, forward merger, or
reverse triangular merger, and a number of non-IP factors will influence the choice, such as assumption of
seller liabilities and tax considerations; however, there is one situation where IP may affect the choice. In a
reverse triangular merger the “seller” remains intact as a corporate entity and is acquired by a specially
formed subsidiary of the buyer. In certain cases, the RTM form can avoid the loss (or renegotiation) of key in-
bound licenses that have an anti-assignment restriction.
It is not unusual for a company to spin-out (or spin-off) a particular corporate business unit, division, or
technology that is either no longer “core” to the business of the company or is not sufficiently profitable. The
divestiture can be complete, i.e., the seller retains no further interest in the divested business (spin-off), or
the seller can maintain an ongoing financial stake in the new venture (spin-out). And, as in the case of sale of
patents per se, the seller may want to retain limited rights to the IP that is owned by the new entity, e.g., by
way of an exclusive field-of-use grant-back license. One of the most difficult, and often contentious issues in
the divestiture of less than an entire business is which patent rights remain with the seller and which go with
the spin-out. This is typically resolved with some combination of ownership allocation via assignment and
licenses to the non-owning party, which may be limited to the field of the retained business, and may be
exclusive or nonexclusive (usually depending on the respective leverage of the parties).
One of the most interesting corporate-level patent monetization vehicles is the formation of a joint venture
around a new corporate entity, a “Newco,” and the transfer by one or more of the joint venture partners of a
subset of their patent rights to the Newco. For example, an aircraft manufacturer may have patents covering a
local area network (“LAN”) architecture for the control and communication systems on an aircraft, but the
patent claims may be broadly written to cover “vehicles” rather than “aircraft.” The aircraft manufacturer could
form a Newco joint venture with an automobile manufacturer. In exchange for equity in Newco, the aircraft
manufacturer would contribute an exclusive field-of-use license under its LAN patents in the automotive field,
and the auto manufacturer could contribute operating capital and management expertise in the automotive
area. Another model involves companies in complementary but noncompetitive fields pooling their expertise
and IP in a new area that exploits both partners’ capabilities. In such a case, each partner would grant an
exclusive field-of-use license to Newco limited to the field of Newco’s business (which is defined so as to not
overlap with the business of either joint venture partner). In addition, one or more of the partners could
contribute operating capital, unpatented know-how, machinery and equipment, technical employees, and/or
management executives to Newco.
INVESTMENT AND FINANCING VEHICLES
An interesting new variation on the corporate spin-out theme involves what is essentially outsourced product
and IP development financed by capital markets. Institutional investors have recently discovered that
intellectual property, and patents in particular, comprise a commercial asset class like corporate securities
and real estate, and like these traditional asset classes can be monetized in ways that produce financial
returns to professional investor groups similar to private equity limited partners and REITs. This interest has
produced a new corporate spin-out model for non-core technologies and associated IP that has, for various
reasons, become “stranded” within large technology companies and likely will die if it remains where it is.
The technology assets are spun out into a development company that has a finite life of say, six to 24
months, during which time the technology and IP is improved, extended, groomed, and packaged for one of a
variety of exits, including M&A, creation of an operating company, creation of an exclusive field-of-use
licensing company, creation of an assertion-based (nonexclusive) licensing company, etc. The technology/IP
originator assigns the IP to the spin-out (possibly with an exclusive field-of-use grantback license in its core
business area) and takes a minority equity interest in the spin-out entity. Operating capital during the holding
period comes from high net-worth individuals or institutional investors. The value proposition to the
technology originator is simple — a minority interest in something is better than full ownership of nothing.
Finally, patents can be monetized by using them as collateral for what is essentially a loan. This may take the
form of a conventional bank loan secured by IP or one of the recently introduced IP-backed asset financing
vehicles, such as sale-and-license-back arrangements or the securitization of future royalty streams.
CONCLUSION
Based on the above discussion, one way to conceptually distinguish the assertion model from the business
opportunity model is that the former deals with patents as a legally enforceable exclusionary right while the
latter deals with patents as a commercially tradable asset class. When one views intellectual property, and
patents in particular, in this way, the analogies to commercial exploitation of other asset classes become
evident. For example, many of the exploitation models associated with real property can be applied to
patents, i.e., aggregation, subdivision, development, brokerage, etc. Similarly, patents can be compared to
corporate securities and the various services provided by traditional investment banks can be applied to
patents, including broker/dealer services, merger and acquisition advisory services, equity underwriting, and
so on. In fact, all of the business opportunity monetization options discussed above can be consolidated in
one entity, the IP Investment Bank.
Ron Laurie is the co-founder and managing director of Inflexion Point Strategy, LLC, an IP investment bank
that represents technology companies and institutional investors in connection with the acquisition and sale
of patents and related technology assets.
exclusionary right, i.e., the right to exclude others from operating within the product or process space defined
by the patent claims. A patent that current and prospective infringers know will never be asserted against
them has zero economic value. Thus, a patent implicitly carries with it the potentiality, i.e., the threat, of
assertion, and the value of the patent ultimately reflects the collective commercial risk that potential
infringement litigation targets assign to that threat. On the other hand, patent assertion as a monetization
model implies something more. Typically, the assertion entity has no other business and thus is not
vulnerable to counterclaims for infringement of its targets’ patents. It says to the target, “We have a patent that
covers what you are doing. Pay us a royalty or we will sue you.” The assertion model is essentially a zero-
sum game, and the pejorative moniker “patent trolls” has come into vogue
as a way to describe those who exploit this model, although there is
considerable controversy surrounding what attributes distinguish a troll
from a legitimate patent enforcer. The value proposition for the troll’s target
is either to pay for a nonexclusive license (or covenant not to sue), or to
contest infringement and/or validity of the patent in court and risk a
damages award in the form of a reasonable royalty (which may be trebled
for willful infringement) — or worse, the possibility of an injunction.
In contrast to the assertion model, the business opportunity model of patent monetization is premised on a
win-win value proposition, and takes many forms. These include: a) an outright sale of the patent, with or
without a continuing economic interest; b) one or more exclusive field-of-use licenses in selected vertical
markets or discrete commercial applications; c) nonexclusive licenses coupled with technology (know-how)
transfer; d) corporate transactions involving the sale or merger of entire companies or the spin-out of
divisions, business units, or technologies; and e) various investment and financing vehicles.
OUTRIGHT SALE OF THE PATENT
The simplest monetization alternative is an outright sale of the patent. The buyer could be a company that is
already operating in the technology space represented by the patent or one that is about to enter the field, or,
with increasing frequency, the buyer may be an institutional patent aggregator. The former group may be
characterized as strategic buyers and the latter as financial buyers. The purchase price can be a lump sum,
either in cash, stock, or a combination of the two, or it can involve a continuing revenue stream (a “tail”) based
on performance. In the latter case, the seller will usually retain a reversionary interest in the patent(s) such
that if certain financial milestones are not met, ownership reverts to the seller.
If the seller is an operating company, sale of a patent may also involve retention of some rights under the
patent by the seller via a reservation of rights or a grant-back license. The grant-back may be nonexclusive or,
if the buyer and seller are in different fields (and the patent covers both), an exclusive license within the field
of the seller’s business. In either case, issues as to whether the grant-back license: a) includes sub-license
rights; b) covers follow-on or improvement patents granted to the buyer; and/or c) survives change of control
of the seller/licensee are important, are often contentious, and can be the subject of substantial negotiation.
EXCLUSIVE FIELD-OF-USE LICENSES
Another business opportunity model involves the granting of one or more exclusive field-of-use licenses, one
of the most valuable and versatile tools available to patent owners. For example, assume that the patent(s)
cover not only the patent owner’s products and markets but other applications as well. The patent owner
could grant a third party an exclusive field-of-use license for all fields outside the owner’s business. A well-
known variant of this approach is for the patent owner to define “core” versus “non-core” applications of its
patents to its business and grant nonexclusive licenses to others for the non-core applications. Alternatively,
instead of granting a single exclusive field-of-use license, the patent owner can define a number of non-
overlapping applications of the patent, sometimes called “verticals,” and grant an exclusive license within
each vertical to a different party. Finally, to the extent that several parties are in different businesses and they
each have patents covering both their business and the business of the other part(ies), they can enter into
exclusive field-of-use cross-licenses, whereby each party aggregates an exclusionary position in its field of
interest. This can be particularly effective in creating contractual joint ventures. One thing that must be borne
in mind when creating any exclusive field-of-use licensing program is to ensure that the licensee has full
enforcement rights within its field (the standing issue) and that the patent owner agrees to join in any
enforcement action (the joinder issue).
NONEXCLUSIVE LICENSE AND TRANSFER OF KNOW-HOW
While “bare” nonexclusive licenses (or covenants not to sue) are one of the identifying attributes of the patent
assertion model discussed above, there is a form of nonexclusive license that falls within the business
opportunity model, namely a nonexclusive license coupled with the transfer of know-how, technical support,
etc. This is generally referred to as a technology license and represents the difference between “stick”
licenses (the assertion model) and “carrot” licenses (the business opportunity model). A number of “IP
companies,” such as Rambus, Tessera, Interdigital MIPS, and ARM, have been formed, or have evolved,
around this model. Typically, the company has three operating units: R&D, IP licensing, and customer
support. The only “product” in the conventional sense is the technology that is transferred to the customer,
which may take the form of digital design data, such as microprocessor cores or cell libraries. The customer
support activity assists the customer in integrating the technology into its products or processes. Patent
monetization may also occur in the larger context of a corporate transaction such as a sale or acquisition of a
company, divestiture of a business unit, or merger of two companies.
CORPORATE TRANSACTIONS
The sale of a technology company whose corporate value or market cap is largely represented by “intangible
assets” is, to some extent, a patent monetization transaction. The consideration for the sale can be all cash,
all stock, or a combination of the two. The sale can occur via an asset sale, stock sale, forward merger, or
reverse triangular merger, and a number of non-IP factors will influence the choice, such as assumption of
seller liabilities and tax considerations; however, there is one situation where IP may affect the choice. In a
reverse triangular merger the “seller” remains intact as a corporate entity and is acquired by a specially
formed subsidiary of the buyer. In certain cases, the RTM form can avoid the loss (or renegotiation) of key in-
bound licenses that have an anti-assignment restriction.
It is not unusual for a company to spin-out (or spin-off) a particular corporate business unit, division, or
technology that is either no longer “core” to the business of the company or is not sufficiently profitable. The
divestiture can be complete, i.e., the seller retains no further interest in the divested business (spin-off), or
the seller can maintain an ongoing financial stake in the new venture (spin-out). And, as in the case of sale of
patents per se, the seller may want to retain limited rights to the IP that is owned by the new entity, e.g., by
way of an exclusive field-of-use grant-back license. One of the most difficult, and often contentious issues in
the divestiture of less than an entire business is which patent rights remain with the seller and which go with
the spin-out. This is typically resolved with some combination of ownership allocation via assignment and
licenses to the non-owning party, which may be limited to the field of the retained business, and may be
exclusive or nonexclusive (usually depending on the respective leverage of the parties).
One of the most interesting corporate-level patent monetization vehicles is the formation of a joint venture
around a new corporate entity, a “Newco,” and the transfer by one or more of the joint venture partners of a
subset of their patent rights to the Newco. For example, an aircraft manufacturer may have patents covering a
local area network (“LAN”) architecture for the control and communication systems on an aircraft, but the
patent claims may be broadly written to cover “vehicles” rather than “aircraft.” The aircraft manufacturer could
form a Newco joint venture with an automobile manufacturer. In exchange for equity in Newco, the aircraft
manufacturer would contribute an exclusive field-of-use license under its LAN patents in the automotive field,
and the auto manufacturer could contribute operating capital and management expertise in the automotive
area. Another model involves companies in complementary but noncompetitive fields pooling their expertise
and IP in a new area that exploits both partners’ capabilities. In such a case, each partner would grant an
exclusive field-of-use license to Newco limited to the field of Newco’s business (which is defined so as to not
overlap with the business of either joint venture partner). In addition, one or more of the partners could
contribute operating capital, unpatented know-how, machinery and equipment, technical employees, and/or
management executives to Newco.
INVESTMENT AND FINANCING VEHICLES
An interesting new variation on the corporate spin-out theme involves what is essentially outsourced product
and IP development financed by capital markets. Institutional investors have recently discovered that
intellectual property, and patents in particular, comprise a commercial asset class like corporate securities
and real estate, and like these traditional asset classes can be monetized in ways that produce financial
returns to professional investor groups similar to private equity limited partners and REITs. This interest has
produced a new corporate spin-out model for non-core technologies and associated IP that has, for various
reasons, become “stranded” within large technology companies and likely will die if it remains where it is.
The technology assets are spun out into a development company that has a finite life of say, six to 24
months, during which time the technology and IP is improved, extended, groomed, and packaged for one of a
variety of exits, including M&A, creation of an operating company, creation of an exclusive field-of-use
licensing company, creation of an assertion-based (nonexclusive) licensing company, etc. The technology/IP
originator assigns the IP to the spin-out (possibly with an exclusive field-of-use grantback license in its core
business area) and takes a minority equity interest in the spin-out entity. Operating capital during the holding
period comes from high net-worth individuals or institutional investors. The value proposition to the
technology originator is simple — a minority interest in something is better than full ownership of nothing.
Finally, patents can be monetized by using them as collateral for what is essentially a loan. This may take the
form of a conventional bank loan secured by IP or one of the recently introduced IP-backed asset financing
vehicles, such as sale-and-license-back arrangements or the securitization of future royalty streams.
CONCLUSION
Based on the above discussion, one way to conceptually distinguish the assertion model from the business
opportunity model is that the former deals with patents as a legally enforceable exclusionary right while the
latter deals with patents as a commercially tradable asset class. When one views intellectual property, and
patents in particular, in this way, the analogies to commercial exploitation of other asset classes become
evident. For example, many of the exploitation models associated with real property can be applied to
patents, i.e., aggregation, subdivision, development, brokerage, etc. Similarly, patents can be compared to
corporate securities and the various services provided by traditional investment banks can be applied to
patents, including broker/dealer services, merger and acquisition advisory services, equity underwriting, and
so on. In fact, all of the business opportunity monetization options discussed above can be consolidated in
one entity, the IP Investment Bank.
Ron Laurie is the co-founder and managing director of Inflexion Point Strategy, LLC, an IP investment bank
that represents technology companies and institutional investors in connection with the acquisition and sale
of patents and related technology assets.
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