Energy companies have invested more than $20 billion in intellectual capital, including patents, but have yet to unlock the financial value of their patent assets and maximize the return on investment. Most E&P companies have either underutilized their patent assets, abandoned them or allowed them to expire. At a time of extreme market volatility, E&P companies would be wise to monetize their significant patent investments as a way to increase shareholder value and generate cash.
Why is it important?
Officers and directors of a corporation have a fiduciary duty to act in the best interest of a corporation and its shareholders, including the pursuit of profits and shareholder value. For this reason, the C-suite and board of directors are asking the question, “How do we unlock the financial value of our significant patent assets to increase profits, margins and market share?” This inquiry represents a shift in thinking from the traditional business model of collecting patents for defensive purposes to a strategic offensive purpose, which should include patent monetization.
Each patent represents a substantial investment not only in R&D but also in the procurement and maintenance of the patent itself. Typically, a patent having international protection can cost up to $100,000 over its life, depending on the number of countries where protection is sought. From a cost vs. benefit standpoint, however, a closer examination of the majority of patents reveals that this cost is not offset by the revenue their owners generate from commercial products covered by those patents. Nevertheless, companies often will continue to let these assets lie fallow, often at a cost to the company, without determining their true financial value.
Opportunity for liquidity
Every E&P company should be valuing its patents to determine if they can be licensed for cash, especially in the current economic climate. Revenue flows generated through licensing patents can be customized to meet a company’s financial objectives. For example, if a patent owner needs to generate revenue quickly and is willing to sell the patents, revenue can be received up front in the form of a discounted lump sum. On the other hand, if a patent owner is willing to partner with a monetization firm, it can receive some of the revenue up front on a discounted basis and the remainder of the revenue on a nondiscounted basis upon completion of the licensing program.
Valuation begins by determining which of its patents cover products or services sold by other companies. The patents are then evaluated using key criteria such as the criticality of the patent to the covered products and services and their sales volumes. For each patent, a company also must determine whether it has already licensed the companies selling covered products or services. It also is important to recognize that the licensing and enforcement of patent rights can vary substantially in various countries. This valuation requires the expertise of a multidisciplinary team that includes a patent attorney, an engineer and a patent licensing appraiser.
Unlocking the value of patents
Once they have estimated a value for their patents, companies can use patent litigation to unlock the financial value of their patent portfolios. Patent litigation is undertaken to enable the patent owner to obtain injunctions that exclude other companies from making, using or selling products or services covered by the patent. If the patent litigation is successful, the patent owner can forego its pursuit of such injunctions and instead choose to allow the other companies to continue making, using or selling the covered products or services in exchange for license fees.
Most companies are unwilling to take the patent litigation path because of its significant cost (typically $2 million to $10 million in attorney fees per litigation). This cost diverts cash from core business operations. Another reason companies do not pursue patent litigation is its complexity; most companies do not have the multidisciplinary expertise (legal, technical and business) or staffing bandwidth to pursue patent litigation with a high probability of success, even if they hire competent outside counsel. A final reason patent litigation is often not pursued is that it could lead to retaliatory counterclaims and countersuits being filed by the companies that are infringing the patents.
Outsourcing licensing
To avoid the pitfalls of litigating their own patents, companies have begun partnering with monetization firms to enforce and license their patents. These firms generate financial rewards for the patent owner by licensing the patents on behalf of the owner. This partnership can be structured to shift the risk and cost of patent litigation to the monetization firm. As a result, the patent owner does not bear the cost of the patent litigation, burden of staffing or potential of counterclaims/countersuits.
Also, this partnership is scalable to allow the monetization firm to immediately pursue any number of licensing transactions, ranging from one to potentially more than a hundred. As a result, the patent owner can realize a return on its patent investment while shifting the costs and risks that come with enforcing patents.
Stop leaving money on the table
Companies that effectively unlock the financial value of their patent portfolios enhance shareholder value as well as generate a return on investment. It is essential that companies leverage their intellectual capital—and especially their patents—in ways that differentiate themselves from their competitors to achieve a strategic competitive advantage.
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