One Company’s Trash Is Another’s Treasure in Patent World

Squeezed out of the mobile-phone market by trendier offerings, Nokia Oyj (NOK1V), Ericsson AB (ERICB) and other one-time leaders are selling chunks of their patent portfolios, often to the litigious licensing firms the industry has derided.

The companies are being driven by their need for greater profit, and are finding that with changing business models, tough economics and investor pressure, there is little reason to hold on to patents for computer memory, wireless infrastructure and other technology that can still fetch a good price.

“There’s a frenzy to try to monetize” these patent portfolios, said Nick Rodelli, a senior analyst at CFRA, a New York-based-based forensic accounting and legal research firm.

Ericsson, Panasonic Corp. and Hewlett-Packard Co. combined sold almost 5,000 patents in the first quarter, according to Innography Inc., an Austin, Texas-based maker of software to analyze patent portfolios. Nokia on July 7 said it had sold a group of phone patents to licensing company Wi-Lan Inc.

Picking up the pieces are licensing firms whose sole mission is to buy castoff patents and then demand royalties from other companies in a strategy to make a profit.

“There’s a whole industry of buying and selling patents,” said Innography Chief Executive Officer John Martin.

Under Pressure

While historical data is difficult to come by since the vast majority of patent transactions aren’t publicly disclosed, the general trend is accelerating, said Martin.

The reasons for selling are often basic economics.

Ericsson, which helped to define the mobile-phone market in the 1980s and 1990s, lost so much market share in the 2000s it refocused on networks and other technology. Once-dominant Nokia met a similar fate and is now reshaping itself after selling its unprofitable mobile-phone unit to Microsoft Corp. in April; Panasonic also is restructuring to end losses from televisions, semiconductors, mobile phones and circuit boards.

“They’re under even tighter economic pressure, and say ‘If they want to continue to innovating, we’ve got to go beyond just getting money from our products,’” said Joe Beyers, CEO of licensing firm Inventergy Global Inc. “Large companies are willing to open their portfolios to the right people.”

He said his Campbell, California-based firm, has bought patents from Nokia, Panasonic and Huawei Technology Co.

Some investors want companies to do more with patents. In a May 14 letter to Sony Corp., Third Point LLC’s Daniel Loeb said one way Sony might increase profits is to “review its world-renowned intellectual property catalog to determine whether any of its patents might be monetized without harming business prospects.”

Patent Alliance

Google Inc. and Apple Inc., two of the most-sued companies, have been pushing Congress and the courts to curtail the practices of some licensing firms. Google yesterday said it created a program with Canon Inc. that could curb some future infringement claims.

Participating companies pledge that if they sell some of their patents, all members of the group automatically get a royalty-free license to them. The goal of the alliance, known as the License on Transfer Network, is to limit cash demands when a company sells patents to licensing firms.

For companies like Nokia and Huawei, it’s a matter of getting some compensation for the billions of dollars spent on research, while not having to deal with the costs and hassle of licensing and litigation or the fees needed to keep a patent in force.

‘Monetizing Investments’

“We have never done these divestments as a proxy for litigation,” Paul Melin, chief intellectual property officer for Espoo, Finland-based Nokia, said. “They are purely about monetizing our investments.”

Patent sales are “the normal course of business” in the technology sector, said William Plummer, a spokesman for Huawei, China’s biggest maker of phone-network equipment.

“We optimize and adjust our portfolio from time to time to serve our best business interests, including occasional divestiture of small numbers of patents from what is a rather huge patent portfolio,” Plummer said.

All of this contributes to a rise in litigation, particularly by licensing companies. The total number of patent suits rose to more than 6,000 last year, according to studies by Lex Machina, a Menlo Park, California-based legal analysis company, and PricewaterhouseCoopers LLP’s PwC.

Settling Cases

The surge was matched by an increased numbers of patents being issued, according to the PwC report released today. Companies that don’t make products, known as non-practicing entities, typically settle their cases, and have a 25 percent chance of victory if the case goes to trial or before a judge for final decision, according to the report. Operating companies had only a slightly higher success rate.

Recent patent sales have been to closely held companies. There is “a lack of transparency of what companies are being paid and by whom,” Rodelli said.

None of the sales reach the $4.5 billion a group including Apple (AAPL), Microsoft, Ericsson and Sony paid for patents from the bankrupt equipment-maker Nortel Networks. After taking the patents they wanted, the companies set up a licensing firm, Rockstar Consortium, that’s sued Google and Samsung Electronics Co. for infringement. It’s sold other patents to Spherix Inc., a licensing company that’s used them to file lawsuits.

Licensing Firms

The trend illustrates a schism between technology companies and their attitudes toward patents. The willingness to sell their patents to licensing firms began during the economic downturn in 2008 and has accelerated, said Beyers, who used to head Hewlett-Packard’s licensing unit.

A patent gives the owner the right to control use of an invention in return for making the technology public, which could spur other innovations.

Companies like Google say many licensing firms don’t contribute to the goal of pushing scientific boundaries and instead hinder startups that can’t operate and pay legal fees at the same time. The Mountain View, California-based company has complained to regulators about what it calls “privateering,” in which a big company sells off some patents but gets part of the proceeds from any licenses or litigation.

“When you have companies who license their technology, legitimate technology, it’s a perfectly legitimate business model,” Melin said.

Beyers said there’s an effort to get more patents in the hands of experienced negotiators so licensing talks don’t end up in court. In a July 8 statement, Inventergy said it was in talks with 20 companies and had identified 135 companies using the technology it owns.

“We’re going to licensees and offering them a portfolio of portfolios,” he said. “If you try to license a small portfolio, you’re more likely to end up in litigation. With a large portfolio, you have a greater potential for a business conversation.”

To contact the reporter on this story: Susan Decker in Washington at sdecker1@bloomberg.net

To contact the editors responsible for this story: Romaine Bostick at rbostick@bloomberg.net Elizabeth Wasserman, Steve Geimann

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.