DATA DRIVEN INSIGHTS AND THOROUGH MANAGEMENT OF TECHNOLOGY IP PATENT PORTFOLIOS

Hilco Global Smarter Perspectives Podcast Series to discuss how data driven insights and thorough management of technology patent portfolios can lead to the realization of significant value for companies seeking access to additional sources of liquidity in the current market.

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Steve Katz  0:10  
Hello again and welcome to the Hilco Global Smarter Perspective Podcast Series. I'm your host, Steve Katz. Today we're speaking with Gillian McColgan, Chief Technology Officer at Hilco IP Merchant Banking about how data driven insights and thorough management of technology patent portfolios can lead to the realization of significant value for companies seeking access to additional sources of liquidity in the current market. Just as a little quick background, Hilco IP Merchant Banking, which you'll hear us refer to as HIPMB frequently throughout the podcast today, is a leading provider of intellectual property advisory services, integrating IP expertise and technical experience to empower its customers to protect and grow their businesses by understanding the content and potential of their patent portfolios, and to make informed IP and technology investment decisions. Quite impressively, HIPMB's own engineering team has reverse-engineered approximately 250 distinct smartphones, 75 consumer devices, and 850 semiconductor chips in just the past three years alone. Well, that is impressive. And we're glad to have you on the podcast today, Gillian.

Gillian McColgan  1:19  
Hi, Steven, it's great to be with you today. Thanks for having me.

Steve Katz  1:23  
We're pleased to have you on. Gillian, you and I talked a bit before the podcast about how much of the asset value among large corporations has shifted in recent years from tangible to intangible assets, including, among other things, patents. To get us started today, what can you share regarding how companies should now be thinking about their patent portfolios?

Gillian McColgan  1:44  
Yes, Steve. That's right. It's true. In the last few years, there's been a lot of focus on the value of intangible assets on the balance sheets of companies. And obviously, there's many classes of intangible assets, there's things that people would be much more familiar with, like the value of brand, value of social media, the value of their goodwill, public rights, like water rights, or in our industry, spectrum rights. But another category within that is intellectual property. And intellectual property is really, you can think about that as the asset class that is assets created by the mind or by the human capital within a business. That generally covers things like know-how for example, trademarks, copyrights and patents themselves. And the thing to think about for people who are in technology businesses, or pharma businesses, where part of their portfolio is indeed patents, patents themselves, the creation of them has costs to any business in both time and resources. So patent portfolios themselves as they're being created need to be managed as you would manage any other business asset. It's quite common for companies to have what you would think of as patent programs in-house. And these generally rung along the lines of you have patent filing targets, they have review committees who review the inventions, there's incentive programs for inventors, their multi-year programs, and they run through industry like that, generally. Quite often, what's missing, or what companies or folks don't think about so much is how does the creation of that patent portfolio and the patent program that's driving it actually fit within the business needs of the industry? So where is the strategic overlay? Are the companies asking themselves the questions that are around what is your balance of filings for patents? And the areas what are the purpose of those filings? How do they serve the business need of the company? And if you don't have that strategy, working in tandem with the actual patenting program itself, the patent portfolio that you're creating can quite often get disjointed from the needs of the business. And often we've worked with clients where they have this massive asset, they've got hundreds to 1000s of patents on their books, they come to a point where they need it for a business need either in that they're looking to use it as an asset around which they can raise funds in some way or other either through borrowing against it, or indeed selling or licensing it, or they actually need it in some cases as a defensive mechanism. So in our industry, what we talk about is companies who get approached by somebody else who wants them to license their portfolio or indeed is litigating against them, and they go looking in their own portfolio to see what they have that they can respond with. And if they haven't been running a program that's looking at both as business strategic as well as just the patenting program itself, quite often they're surprised at the answer when they approach their community internally and say, "You know we have competitor x, y, z, and we're in discussions with them, and what can we use against them?" And the answer quite often comes back shockingly to them that we don't know if we've got anything we can use against them. And that hasn't been an area of focus within our patenting programs. So the best thing I can say is that if you are working with a patent portfolio you need to think about it as being an asset of the business and you should be able to articulate and put a value on it in the dollar sense in some way. Whether that is around how it's got a protective value in terms of its protecting technology that's key or critical to the company, whether it is around, it's got a value to a company on a defensive perspective, in that you can use them against other people who are targeting you. Or indeed, if you're looking at it and saying this has to be a source of revenue for us and therefore we're looking at the sale of patents or the licensing patents or some other way of justifying the spend that we have on a daily basis. So I would say in summary, the patent portfolios themselves exist to protect and serve a company and its specific business objectives. And that you should, at some point, be able to articulate the value that you can leverage from that portfolio, whether it's via sales, licensing, litigation, or it serves some other specific reason or business purpose within a corporation. So that's how I think about how you take something that's relatively intangible from a financial perspective and turn it into something that's much more tangible from a business perspective.

Steve Katz  6:59  
Yeah, quite a lot to consider there. Quite complex I would say. And you know, both from the proactive standpoint and the defensive standpoint. So, you know, many times when we look at how evaluations are determined across industries, there are one or two standout example cases that illustrate what makes for a successful outcome. Is there one in particular like that for patent portfolio assets that you might be able to share with the listeners today?

Gillian McColgan  7:26  
Yes. So the first thing I'll say is that for anybody who has worked or had a ringside seat in this industry, the first thing you understand is that the vast majority of the information is never made public. What I'm going to talk about obviously, is something that is a public example, I was fortunate enough to have a ringside seat at it. So there are standout deals that have been made over the years. And one of them that comes to mind that is in the public domain, obviously is the Nortel sale of the portfolio and the bankruptcy. So it's an interesting case, because I think still, at this point many years on it's the largest publicly known sale of a patent portfolio in the industry. So for those of you not aware or not having information about the Nortel bankruptcy, so Nortel was a Canadian company that was in the tech space. It was similar to the likes of Cisco, Microsoft, had feet in many pie. It was the largest Canadian technology company. And in early 2009, it filed for bankruptcy protection worldwide in the US, Europe, and Canada itself. As part of that process, the businesses of the company were all divided up and sold off through bankruptcy auctions. The intellectual property and specifically the patents had to be divided among the many businesses that were part of the corporation that were being offered for sale as individual entities. The patents not used in those businesses were retained with a view to making a decision what to do with them later. So my team was brought in. We worked within the CTO office there and the licensing group there and we ran the entire process from segmenting the patents to those that were used across the various businesses and parceling them up with those businesses for sale and then turning our attention to the approximately 6,000 patent families that were left, which were focused around very, very many areas of technology within the industry and trying to put a plan in place as to what we were going to do with them. The end result was in a couple of years later in 2011. There was an auction of the patent portfolio and talk a little bit more at some point in the future about what happened in the two years prior to that but the nuts and bolts of it were that there was a bankruptcy auction. There was a starting auction bid from Google of $900 million, which everybody externally thought was a fantastic price that was going to be a done deal on the day. The reality of what happened over the next couple of days of the patent auction was that the various bidders interested in the portfolio rocked up in New York, the auction started, and got underway. And ultimately, a group of those bidders formed a consortium called Rockstar and acquired the portfolio for $4.5 billion, which was a startling headline number to those who hadn't been part of the process. And to put it in some context, the rest of the sales of all of the business lines across wireless, data communications, voice, and enterprise had generated a total of $3.34 billion. So in reality, when the numbers were all wrapped up, the Nortel patent portfolio was worth significantly more as an asset for sale than all of the sum total of all the businesses involved. So it comes back to it turns out that there were some unique elements to that in terms of that Nortel actually did have a IP program going for many, many years. It was rather storied program, they did all the things around inventor programs around filings, they did that. But what they actually also had and had been running for many years at that point was an IT strategy that ran alongside it with review from businesses and a focus on looking and reaching outside from a technology perspective of areas where they thought the future is going to be there and that a portfolio could be useful when it was focused around both the defensive and also a market, new market in new emerging areas that Nortel itself wasn't necessarily part of. So there were a number of unique factors that led to the significant sale price. But it is also an example of what can happen when a portfolio is managed well and is dealt with appropriately in terms of extracting and putting that value on the table for buyers and other people to look at.

Steve Katz  12:18  
Yeah, it certainly does drive home that point. And it's also a great example, I think of the increasing value of intangible versus the tangible assets that you mentioned earlier as well. Alright, let's move on. I know you and your team at HIPMB are industry leaders and patent-related due diligence, including engineering, finance, and portfolio management. Can you shed some light for our listeners on the depth of your processes, and whether or not in today's market, a company can realistically undertake any of this internally on their own or whether the complexity and resources required, now really just necessitate engagement of a dedicated out-side resource to get this done the right way?

Gillian McColgan  13:00  
Yes, it's an interesting debate. And it's something that moves backwards and forwards across a sort of pendulum spectrum of models. The reality is that there are very few companies that can afford to justify internally the amount of resources that are needed to do anything realistically beyond managing and licensing some of the portfolio. They tend to be large companies with very significant budgets internally. And if you think or take it back a bit and just think about what a patent actually is. It's a right, that's effectively a negative right, in that it gives you the ability to prevent people copying the invention that you have made. And if they wish to use that invention, then they in some way have to come to a agreement with you around a license to those relative patents. So you can imagine that it's a not inexpensive process just in terms of even compiling a portfolio and managing it, you know, from the filing of the invention to actually getting the granted patent is a multi-year process. And then you have fees to the various patent offices to retain that right. There's also the patent is a limited life grant to you and that in most jurisdictions you get it for 20 years, and you have to pay fees to keep that right valid and in your name. So all of this is a very expensive process, not only in needing people in-house to do all the work associated with it, but also just the sheer amount of money that has to be paid in filing rights and grant rights to the various patent offices around the world. So you've got to have a way of generating some tangible value from it. There are a number of ways you can create that value. Most of it  happens invisibly to the general world in that contracts and licenses and even sales of patents are not necessarily public information. In fact, we work with a lot of clients where actually the existence of the contract on the licensing side is not public, nevermind the actual amount in the contract. So there are a number of people who would say that the industry would benefit from more scrutiny and less invisibility of that. But that's the reality of where it is today. As a team, we work with a variety of vendors and clients. We're in the marketplace. We see a lot of the patent portfolios coming through, either to us to acquire or on behalf of clients to acquire. We work with clients in a variety of ways. We work with them to help them acquire portfolios if we see them, or indeed, we've had clients who've approached us and said, "I want patents in a specific area, can you go out to see what you can find for us?" And we have done those.  We're not per se in the lingo of our industry a broker and that's not a primary part of our business at all but we do do it for specific clients when they requested of us. We do a lot of portfolio management and there's a lot of companies who rely on their technology and their patents and it's a hugely significant part of their business. But they're relatively small companies, and they cannot afford just the sheer headcount expense of doing the portfolio management in-house. So we've had clients that we've basically run that as an external program for them. We work with clients that are looking for support on a licensing perspective, or are indeed looking for our help technically-wise in terms of going through that portfolio, helping them identify the assets that they need to work up and figure out how to move forward in terms of creating value within the portfolio via a sale or license or other things. The licensing can make headlines if it heads towards litigation, because that's as a matter of course, becomes public record. There's been some fairly significant litigations in our space over the years. A few years back, people talked about it as the patent wars between the smartphone players when we had Samsung, and Apple and Microsoft suing each other and various other people along the way. Variety of things have happened once you get into that. So even if you are managing and dealing with a portfolio as a company internally, once you get into litigation, there's a whole process in place around law firms being engaged and experts being engaged by the law firms to help them support the case for the company around infringement and validity. And very often we are retained by those local law firms to do that work. In fact, that's a fairly significant part of our business. In terms of people giving people a sense of type of things we see as kind of business heuristics going forward, our observation is that and I think this ties and aligns with some of the material that's been published externally, our observation is that from the portfolios, we see coming through about 5 to 8 percent of them sell, and those that sell tend to sell relatively quickly. And if they're going to sell, they tend to have had a reasonable amount of investment put in in terms of identifying what the core assets are in it. And doing what in our industry we talk about is some element of evidence of use. And that's basically indicating who is using those patents and where they're using them in some way or another. And that's kind of the bread and butter of a lot of what we do in one form or another whether it's to support litigation, whether it's to support licensing, or whether it's to support the sale of the portfolio. And I think those types of figures that say, portfolios that have evidence of use associated with them, whether it's for licensing or litigation or indeed a sale tend to do better than those that are just lists of patents. Portfolios sell faster if they have evidence of use and they tend to have a larger portion of that 5 to 8 percent that sell. And I think if anybody's interested, there's a variety of reports that Richardson Oliver Insights put out that tends to play to that it kind of says, you know, you're 60% more likely to sell a portfolio that had the evidence of use work done, it will sell faster, and it's likely to generate a sales premium in the 40% range over portfolios that don't have any of that work done. That's kind of why there's a need for our types of teams and why we're busy. It's in that background piece, generating the evidence of use, dealing with market analysis, identifying the potential parties using it, and that's where our core expertise is. So that's really why we're retained by clients. 

Steve Katz  19:58  
Well, it makes a lot of sense. Maybe the thing to do is to drill down a little bit further on that just to provide listeners with some of the criteria that they should be using when selecting a potential provider for intellectual property advisory services. So with that in mind, what type of technical analysis capabilities should a firm under consideration have in your opinion? And from a top line perspective, what best practices should they be adhering to?

Gillian McColgan  20:29  
Yes, so that's the key question in some ways is you've got to take this as a serious business asset and you've got to approach it from a business perspective. And you've got to appreciate that whether it's litigation, defending, licensing, or sale of the asset, the more you have done your homework yourself and put the materials together to indicate to the interested parties on the other side where the value is in that portfolio, the more likely you are to have a successful execution of a revenue sale license, or indeed litigation. Where our team comes in and what we spend our time doing is that we have a process in place, you know, started in 12 years ago, when we were working with Nortel on has been refined and moved forward from that. And we tend to start and look at it from if a company doesn't know what assets it has, we can come in and help them with what we call patent mining, which is effectively comprehensive effort that reviews and scores patents within a number of heuristics in the industry. So it can be directed and targeted towards operational plans for their product support around whether they want to use it for licensing or divestiture as part of the monetization, whether their focus is litigation or indeed defensive response to lawsuit efforts. We take the business approach to it. It's not only about what the patents themselves are, it's not about even who uses them, but it's also looking at what we call the encumbrances and the standards. So encumbrances are those people that are previously licensed or ready to it or any obligations that exist to standards bodies, where there's been particular commitments made to them. It's about what technology areas those patents are in, and who indeed the competitors are in that space. And from that know you get a whole workflow process that goes through a variety of expert reviews, humans actually looking at these things, doing a variety of surveys of the patent space, using some tools we have. We've written a number of machine learning algorithms with a variety of available tools and stuff too. The key deliverable here is that we're looking for an annotated scorecard that comes out of it that points towards where are the significant assets in the portfolio? And what should we do with the next steps on them? And then we go through a variety of analysis. The analysis covers a number of spaces. So first of all, we're marking it looking at the markets, we're looking at the size of the market, the competitive intelligence, regions, targets, addressable products, addressable companies, then we move through if it's got standards relevance. We start looking at to determine whether they're essential, optional, critical to the standard. What declarations have been made to the standards bodies by individual inventors, or indeed by companies. Looking at either patterns in the portfolio that are undeclared through whatever reason that needs to be declared. We look to create the list of the essential standards with the correlations to the standards bodies, the specific documents, the specific technology areas.  We assigned scores to the patents in terms of a variety of technical and invalidity items. And it's a proven workflow that comes through with a variety of subject matter experts, we use a variety of in-house tools, a variety of commercial tools, we've got databases, we've got surveys got a variety of analytics that we've built, and we maintain in-house tools that are useful to us. And the key delivery coming out of all of this is that you get reports back. We have conversations with the clients around, here's the assets, here's the size of the market, here's the financials you should expect, it's really scoped by what the client needs in that aspect around analysis. Sometimes if they have groups in house that can do this, we'll leverage off that and work with them. If they don't have it, we can take it on and do it for them. And then we get into the technical analysis. We start doing what they call infringement analysis, which is realistically looking at what the "who out there" is actually using the invention and how do we gather the evidence of proof for that.  And that's sometimes called claim charts, it can be called evidence of use, it can be called those types of characteristics. And then part of that depending on what the need is, is whether we need to go into reverse engineering and reverse engineering. For those who don't know, this industry, well basically means we rip products apart to actually prove that the invention is used. And whether that is what they call tear downs, opening up devices, or whether it gets into something more significant, where we have to do reverse schematics. We work with partners to do a lot of those things, or whether we need to just get probes and scopes and other technical tools on it and capture the behavior of the product. So all of that is done. There's a variety of tools involved. There's a variety of process involved. Those I think what has evolved as best practice around this in terms of structure and deliverables and that's where we tend to focus our time in terms of on the technology side, doing the analysis, technical analysis, the reverse engineering, and then if it's needed, we move towards the market side, we deal with market analysis, the competitive analysis, or anything else that the client needs. You know, we're a full service team. We have lawyers, we have financial analysts, and we have engineers. The engineering team has 30 years of industry experience, and many of them are inventors themselves. It's a learned processes learned behaviors, and it's evolved over time in the last 12 years since we started doing this for Nortel. And that's kind of where we are today.

Steve Katz  26:22  
Wow, I'm still taking notes for myself, because it's so interesting. And there's just so much great information in there. And given the ongoing impacts of COVID-19 and how critical it is right now for many companies to be able to tap into any and all sources of liquidity that they can access, it really is quite a timely topic for our listeners. So for those of you who have joined us today, regardless of whether your business is at the beginning of its patent journey, or well down the road with a sizable portfolio in hand, it's clear that a conversation with Gillian and her team at HIPMB can help inform the steps you take next, and enhance the outcomes that you can achieve in the future. With that in mind, Gillian's email is gmccolgan@hilcoglobal.com. That's gmccolgan@hilcoglobal.com. Gillian, I work that little Nortel reference in just for you as a special thanks for joining us on the podcast today. It was really a pleasure having you on.

Gillian McColgan  27:23  
Thanks very much Steve, I enjoyed it. I appreciate the time to talk about what we do and how we feel passionate about it.

Steve Katz  27:31  
Yes, and I think you expressed that quite well. And listeners we hope that today's Hilco Global Smarter Perspective Podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague, or client to help make them that much more successful moving forward. Until next time for Hilco Global, I'm Steve Katz.

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