Currently, with the number of companies jumping under the Chapter 11 umbrella, one has to ask where all of the IP is going? Maybe even more importantly, it is very apparent that some small to mid-cap companies are selling their ever-so-important patents just to stay afloat. (For further reading on this topic, there is a great post on IP Finance today titled “Has the Great Patent Fire-Sale Started?”, which recognizes this trend and ponders what this will mean for the respective patent markets). A discussion of the market implications of such a “fire sale” is appropriate. Lets start with the positives.
The “fire sale” some people are so afraid of may actually result in a more efficient use of intellectual property. Most of these sales are effectuated by a sale and license-back scheme, where the selling companies can sell their IP at a premium, while retaining a non-exclusive license to use it for their own operations. In such a case, IP is being owned by whomever values it the most. Furthermore, because more than one competitor may now be using the IP, it promotes competition instead of stagnate monopolization.
Companies often believe that core intellectual property only holds value in the competitive advantage it creates through its operational use. Although this may be true in some cases, a core IP sale and license-back model may be advantageous in other situations. If a company’s IP is critical to its operations, but it needs cash to operate, it may sell its IP to another company in a transaction that allows the selling company to license back the IP for its continued use. This model can be efficient and advantageous for both parties, but the selling company should carefully choose the buyer. In most cases, the license back will not be exclusive. Therefore, the buyer will have the option of licensing the IP to other companies, including the selling company’s competitors. In a case where the IP creates a strong competitive advantage for the selling company, the sale and license back model is not advised unless the buyer agrees to limitations in its own outbound licensing.
Another necessary caution in the sale and license back model for the selling company is transferability of the inbound license. The company will want to consider its own exit strategy. If it desires to sell the company at a later stage, the company will want to make sure that the inbound license is transferable with a sale of the business. If not, then potential purchasers will find no value in a company that can only be sold without its core IP. That is like buying a cell phone without the only battery that turns it on.
Finally, a last concern for a selling corporation is making sure that the core IP it sells is not “all or substantially all” of its assets. Under most state statutes, including Kentucky, this language defines the line between a sale of one asset and an asset sale requiring shareholder approval. When “all or substantially all” of a corporation’s assets are sold, shareholders’ voting rights and dissenters’ appraisal rights are frequently triggered. Therefore, to avoid a chaos of legal issues, careful consideration of this component is necessary.
Although, to some capacity, a “fire sale” may be upon us, there are positives if the sales are conducted carefully. Venture capitalists and, god forbid, patent trolls may attempt to scoop up some of these patents at market-bottom prices. It would be much more efficient, for both parties and for consumers, if market participants obtained the IP and granted a license-back option. According to Ocean Tomo’s Andrew Ramer:
“[The selling company] can essentially raise cash without diluting existing investors. Selling their patents and keeping a license back allows companies to have their cake and eat it, too”. (Via IP Finance)