The PAE Imperative

Jan 10, 2016
miltons ip
Patent assertion entities are the future for many portfolios. {focus_keyword} The PAE Imperative bigstock Cartoon Troll holding a club 25633256

Patent assertion entities are the future for many portfolios.

The most childish debate in patent law is the screaming match about patent trolls. Most of this discussion is utterly devoid of rational analysis, and is just self-interested sloganeering that is either pro-patent (“We need strong patents to keep American innovation great.”) or anti-troll (“The US patent system has run amok!”). Folks who should know better, from Gene Quinn to the White House have published some pretty weak stuff on this subject.

So here is some adult talk about the reality of non-practicing entities, and in particular ‘‘patent assertion entities’ (PAE).

There are overwhelming forces which are relentlessly pushing patent monetization out of operating businesses towards PAEs. I call these forces ‘the PAE imperative’. Interestingly, none of these forces has anything to do with the nuances of patent law that patent attorneys so love to argue about. Instead, they are the forces of contemporary capitalism, with a side order of governance (that nasty mash-up of fiduciary duties, class action lawyers, and insurance).

The duty to maximize shareholder value.

It is a fundamental maxim of modern business that one of the key roles of a business is to maximize shareholder value. It may not be the only role or objective, but it is a very important one. Certainly, the directors and management of a public corporation has a fiduciary duty to identify, secure, and obtain value from the corporation’s assets.

This bears repeating: the board and management of a company must have a plan for monetizing a corporations most valuable assets. Directors cannot just let valuable assets lie fallow or worse, waste away.

Remember KODAK and Nortel? In both of these companies, management had failed to take any significant steps to monetize their patents before the bankruptcy, and yet the patent portfolio ended up being the most valuable asset in the bankruptcy (roughly $1B for Kodak, ~$4B for Nortel). This was an outrageous dereliction of fiduciary duty, a complete failure to even develop a plan to extract value from the corporation’s most valuable asset.

How long will it be before class action securities lawyers, and the providers of D&O insurance (“directors & officers” insurance) recognize that every company with a substantial patent portfolio must have a well thought out and documented plan for monetization of the portfolio? Not long, I suspect.

Focus on core competencies.

No business can be good at everything. In order to maximize shareholder value, a business must focus on its core competencies.

Patents do not enforce themselves.

A patent sitting on the shelf will not enforce itself. A patent will only generate returns for its owner (even an operating business owner) if someone monitors the marketplace, identifies counter-parties, and then asserts the patent with a view to either stopping infringement or securing license revenue. Without on-going vigilance and effort, a patent is a sunk cost, and rapidly wasting asset.

Patent monetization is difficult.

Patent monetization is very hard. It takes time, money, skill, and effort over a sustained period of time. If you think otherwise, you are probably delusional and certainly have never been involved in a patent infringement suit.

Patent enforcement is rarely a core competency

There are very few business that have real internal capacity to enforce patents. There are a few, such as big pharma, for whom patent enforcement is one of their key business endeavors, but they are few and far between. Conversely, there are many of businesses that own large patent portfolios, with no obvious capability or desire to enforce the patents that they have generated.

If patent enforcement is your core competency, then you are a PAE.

By definition, if your primary business activity is enforcing patents, you are a patent assertion entity (PAE). If it is one of several core competencies, then, like big pharma, you are likely well on your way from being an R&D shop towards becoming a PAE.

The PAE Imperative.

Put these principles together, and it is clear that the pressure on operating businesses to put their patents into PAEs will intensify. Any company that wants to make a credible effort to monetize its patent portfolio needs to give a lot of thought to spinning its portfolio out into a PAE, whose sole focus and core competency is patent monetization. Put another way, if your organization is an operating business with a big patent portfolio, and it does not have a clear, well-articulated rationale for why you have not spun the portfolio out into a PAE, your directors and management are running a serious risk of being held to account for breach of their fiduciary duties. Blackberry are you listening?

Neil