Intellectual Ventures Still Buying Patents: Q&A with the Purchaser-in-Chief

As The Prior Art recently reported, Ocean Tomo’s last San Francisco patent auction was a bust. Still, as was true last year, there was plenty of scuttlebutt about what role giant patent-holding company Intellectual Ventures (IV) might play at the event. TPA reported on some of that speculation, which prompted a note from Kevin Barhydt, director of IV's acquisition program.

Intellectual Ventures does not publicly talk about specific patent purchases or its licensing activity—a policy that was in full effect when TPA spoke with Barhydt last week. Despite the lack of specifics, Barhydt did have some interesting things to say about IV's acquisition program. Over the past several years, the company has acquired more than 20,000 patents. About 15 percent were purchased at auction, 20 percent were bought when sellers approached IV directly, and the rest were acquired via brokers representing sellers or agents representing IV.

Another note: in this interview, Barhydt uses the term 'asset' synonymously with patent, which might be confusing to some. The interview was edited and condensed.

Give me the basic outline of IV's patent acquisition program.

First, we have strategic acquisitions. Those are typically very large transactions, often times focusing on large portions of a bigger company's portfolio, maybe working with a third party like a private equity buyer.

Then we have "targeted acquisitions"—think of this like our "proactive" channel.  Our revenue generation channels—licensing—identify assets that fit needs of the current portfolio, as well as buy towards future offerings. We then have a team that reaches out to the owners of those assets (individual inventors, companies- small to large, universities) and explore the possibility of a potential acquisition deal. 

Finally, market-driven opportunities are the "inbound" opportunities—deals that come from brokers, and from our own finder network.

Once we have a handshake agreement on a deal and a contract in place, we put the patents through the intake process. That includes very detailed "chain of title" work. We make sure that once we've acquired the asset, we acquire it free and clear.

At the end of the San Francisco auction, Ocean Tomo CEO Jim Malackowski said, "Obviously, the market is becoming more selective." Do you agree?

I fully agree with that. It's a fascinating time to be buying patents. There's a huge increase in supply in the marketplace. In the last nine months, we've seen over a threefold increase in the number of assets presented to us. It puts us in a great position to increase our selectivity.

A couple of things are going on. One, the economy is a driving force that determines which assets are available. It's a great opportunity for a lot of companies to take their IP from a cost center to a profit center. And companies are much more comfortable with the idea of selling patents.

Arguably, we were in a bit of a bubble with prices. The prices had definitely been inflated. And there had been a 'gold rush' mentality in the sales part of the industry. I think you saw a drastic increase in number of brokers, similar to [the] real estate [bubble].

How do you decide what to buy?

We have several different technology categories we focus our buying in. Within each of those portfolios, it varies. There are portfolios where we are really down to just focusing on one or two small areas. Then there are areas where we may be making some more future bets based on a potential technology road map. At the end of the day we're looking to generate a significant return on our investment. That's what guides our decisions.

How does the revenue-generating side of IV connect to what you do in patent acquisition?

My job is not that interesting if we're not generating revenue. Revenue generation is key--and we've been quite successful, generating about $1 billion of revenue. My team and I work hand in hand with the licensing organization to understand what their needs are. It's a close relationship to say the least.

What's the biggest difference in how you're operating now as opposed to a year or two ago?

Even 12 months ago, we were buying one out of every 5 to 7 deals we saw. Now we're much closer to buying one out of every 15 to 20 deals. It's driven by two things: increase in supply in the industry, and our already large and strong portfolio.

There's been a lot of speculation about your participation—or lack thereof—at Ocean Tomo auctions. So, how much have you bought?

I can't get into specifics about what we bought in past auctions. I can say we've been involved with the auction since its early days. I think the results of the last auction do reflect, market-wise, the increase in selectivity. We had seen over 50 percent of the assets offered before in one way or another.

You'd already seen more than 50 percent of those patents for sale? That seems like a lot.

In the patent market generally, you do see a lot of portfolios get "recycled." That makes sense. Sometimes portfolios need to wait a few years before their value gets seen, in terms of what technology path companies take. What happens quite frequently is that when a seller enters the market, they have outlandish expectations. Six months or a year later, they come back and have more reasonable expectations.

Speaking of sellers, how has their perspective changed over time?

The assets they're willing to consider for sale is a broader set than we saw previously. The default rule before has always been, "We've got to be very safe and make sure we hold onto everything." Now, that's being questioned internally. Assets that may have been viewed as sacred a couple years ago are not being viewed as such now.

How do you evaluate patents, and decide what they're worth?

It’s definitely a combination of science and art, from a technology perspective and from a legal perspective. You look at what the addressable market would be for licensing. A fourth factor—unique to us—is where it fits within our portfolio. There are certain deals we see where we already have a lot of really great assets in that space. So, we have to discount the evaluation, because what is the incremental value to us?

In one lawsuit I looked at recently, a named inventor on a patent ended up discounting the invention during litigation, calling it "trivial." That has to affect the value of a patent. How can you account for that?

In the scenario where you're dealing with a company that is 100 percent focused on litigation, they have to know exactly where the inventor stands and how that plays out in a courtroom. We're not dealing with the same probability [of litigating].

But inventors are key to us. To date, a little over $300 million of our spending has gone to individual inventors. There are cases where we work hand in hand with inventors. In some cases, we establish long-term relationships with them. In some cases, they continue to prosecute the assets.

What's going to happen going forward with Intellectual Ventures? Are its more than 20,000 patent purchases part of a larger strategic initiative?

I wouldn’t say that. We've developed a very large and strong portfolio, and there's a huge increase in supply. By all means we're going to be more selective going forward. But we are actively buying in the marketplace. That has not changed at all. We intend to continue to be active in buying in the marketplace. We will continue buying for that entire time.

UPDATE 2:20pm: An earlier version of this Q&A misspelled Kevin Barhydt's name.

Illustration: Christie's auction room in London. T. Rowlandson and A. Pugin, via Wikimedia
 

Comments

[Ben duPont]

Fasinating.....