IAM benchmarking survey 2016

For those hoping for an IP market rebound, this year’s IAM IP market benchmarking survey will be a sobering read. Looking at the main findings, it is hard to believe that just a few years ago, IP deals were headline news, generating big money and leading some to talk about the rise of a new asset class. How times change. Nowadays, although transactions are still happening, values are lower and it is definitely a buyer’s market out there. Licensors, too, are finding it tough – especially if they are non-practising entities (NPEs). All this before you consider current uncertainties around patent eligibility in the United States and the value of standard-essential patents (SEPs).

However, it is not all bad news. Although the United States poses major challenges to rights holders seeking to create value from their assets, Germany continues to grow in popularity, while the Unified Patent Court (UPC) promises to position Europe as a global patent litigation hub. Moreover, senior managements – perhaps more alert to the costs of building and maintaining IP portfolios – seem to be increasingly focused on aligning IP and overall corporate strategy than ever before.

For six weeks between mid-February and late March 2016, IAM conducted our annual benchmarking survey with the aim of discovering what our readership thinks about a range of subjects, including:

• overall corporate awareness of IP issues;
• the relationship between NPEs and operating companies;
• patent values and valuation;
• the state of the IP market;
• the performance of leading patent offices;
• leading jurisdictions for litigation;
• the potential impact of the EU unified patent system;
• the reform process in the United States; and
• the biggest threats to IP value creation.

To understand how readers’ opinions differ depending on their position in the IP ecosystem, we created three bespoke questionnaires, each tailored to a specific demographic. The first was for those managing IP portfolios in operating companies; the second was for NPEs; and the third was for private practice lawyers and attorneys. Clearly, these categories do not cover everyone who reads IAM, but we had to draw the line somewhere!

We received more than 600 responses, primarily from individuals in senior positions. All respondents were guaranteed full confidentiality. Over the following pages we have selected many of the most interesting of the findings and broken them down into the following categories:

• demographic;
• IP management;
• IP market – buying and selling;
• IP market – licensing;
• quality and procurement;
• litigation;
• the unified patent and UPC;
• US patent reform; and
• the threats facing rights holders.

In each area we look primarily at the responses from operating company respondents and compare them with those of their NPE and private practice counterparts. Some of the results may well be unexpected, but what will come as no surprise is that an individual’s opinion of the IP market is heavily influenced by his or her position in it.

Perspective is everything; and with that in mind, remember too that this is an audience of IAM readers. These are people who see intellectual property as a business asset and who work at the cutting edge of IP value creation; the views they hold are not necessarily representative of those prevalent in the wider IP universe.

Demographic

Figure 1. Your job title (operating company)

Figure 2. Your job title (NPE)

Figure 3. Your job title (private practice)

Figure 4. In which industry does your company operate? (operating company)

Figure 5. Your office location (operating company)

Figure 6. Your office location (NPE)

Figure 7. Your office location (private practice)

IP management

Finding ways to make money from intellectual property remains the primary challenge facing IP managers in operating companies in 2016. However, since last year’s survey, tracking inventions is significantly higher on their agendas, jumping from sixth place in 2015 to the second most important issue this year. This commitment to ensuring that all of the intellectual property being generated within an organisation is carefully managed and capitalised upon could be due, in part, to senior management’s increased interest in IP issues: almost one-third of respondents strongly agree that leadership is actively involved in strategic planning related to intellectual property, up from one-quarter in 2015.

Despite this closer involvement from leadership, only 12% of those surveyed state that IP strategy and business strategy are in perfect alignment. However, while perhaps not perfect, 62% claim that the two strategies are well aligned and just 4% believe that they are not at all in sync.

The vast majority (85%) strongly agree or agree that leadership appreciates the value and importance of intellectual property, and almost half of the survey respondents feel under increasing pressure from senior management to monetise the company’s IP portfolio. However, enthusiasm for valuation of those portfolios has taken a slight dip since last year, with 43% of respondents claiming that portfolio valuation is an essential part of any IP strategy – down from 50% in 2015 – and 12% asserting that it is a waste of time and money, compared with 8% of last year’s respondents.

Figure 8. What is your opinion on IP portfolio valuation? (Select a maximum of three options) (operating company)

Figure 9. My company’s leadership appreciates the value and importance of intellectual property (operating company)

Figure 10. My company’s leadership is actively involved in strategic planning related to intellectual property (operating company)

Figure 11. The IP function is coming under increasing pressure from senior management to monetise the company’s IP portfolio (operating company)

Figure 12. How aligned is IP strategy with business strategy in your organisation? (operating company)

The market – buying and selling

The good news is that people are still buying and selling patents. The bad news is that, compared to last year, the numbers are way down. While 52% of operating company respondents stated that their organisations had bought patents in the 2015 survey, that figure has dropped to 32% this year. Likewise, 27% of corporate participants in this year’s survey state that they sold patents over the preceding 12 months, while last year the figure was 40%.

Prices, too, continue to fall, it seems: 48% of corporate respondents say they have fallen (the figure was 31% last year), while 71% of NPEs say the same (75% last year). These are some pretty steep declines over a two-year period. As to the reasons why, it looks as though the increasingly hostile environment is driving the falls. Both operating company and NPE participants primarily point the finger squarely at the inter partes and covered business method review regimes at the Patent Trial and Appeal Board. However, they disagree about what is next in line for blame, with operating companies highlighting the increased difficulty of enforcing SEPs and NPEs pointing to over-supply in the market.

Asked why they buy patents in the first place, 38% of operating companies state that it is to secure freedom to operate. This is a big number, but it is way down on last year’s figure of 52%; it could be that lower prices are leading to more strategic purchases. Meanwhile, developing monetisation opportunities and seeking to keep patents out of the hands of competitors and NPEs have both risen in popularity compared to 2015.

Figure 13. In the past year, has your company sold patents? (operating company)

Figure 14. In the past year, has your company sold patents to an NPE? (operating company)

Figure 15. In the past year, we have seen the number of corporate IP owners selling patents to NPEs increase (NPE)

Figure 16. What best describes your approach to patent acquisition? (Select up to three options) (NPE)

Figure 17. In the past year, has your organisation bought patents? (operating company)

Figure 18. If your company has bought patents in the past year, has it been primarily to: (operating company)

Figure 19. In terms of pricing, do you believe that: (operating company)

Figure 20. In terms of pricing, do you believe that: (NPE)

Figure 21. When purchasing a patent, do you use a broker? (operating company)

Figure 22. When purchasing a patent, do you use a broker? (NPE)

Figure 23. When divesting a patent do you use a broker? (NPE)

The market – licensing

It has become increasingly tough to get licensing deals done and the outlook looks pretty bleak, according to both corporate and NPE respondents. Royalty rates are going south, accused infringers are less willing to sit down to negotiate prior to a suit being filed and fewer agreements are being inked. As to the future, 13% of operating company respondents and 23% of those from NPEs fear that the market will worsen in the coming year.

Against this backdrop, corporate owners of SEPs are increasingly reviewing how those assets are managed; 27% state that they are either reconsidering their relationships with standard-setting bodies or less likely to declare their patents standard essential than they have been previously. This finding comes a year after the release of the controversial new Institute of Electrical and Electronics Engineers patent policy.

As to what might be done to help mitigate the effects of this inclement climate, 27% of operating companies report having worked with NPEs in the last year to transfer much of the cost, risk and time involved in developing a licensing programme. For their part, 30% of NPEs are now exploring opportunities outside the United States. With the UPC on the horizon – assuming that the United Kingdom does not vote to leave the European Union and put the whole project on ice – this may also become a favoured path for operating company licensors in the coming years. It will be a trend to look out for.

Figure 24. In the past year, we have been working with more operating companies than has previously been the case (NPE)

Figure 25. Have you worked with an NPE in the past year? (operating company)

Figure 26. Accused infringers have been less willing to settle cases in the past year than they have previously been (NPE)

Quality and procurement

As in previous IAM benchmarking surveys, the European Patent Office (EPO) comes out on top for both quality and service among all three categories of IP professional surveyed. As many as 65% of respondents from operating companies rated the quality of the patents issued by the EPO as excellent or very good, as did 54% of NPEs and 62% of private practitioners. The Japan Patent Office (JPO) is ranked second by all three groups of respondents, just as in 2015. Respondents from operating companies and private practitioners then place the US Patent and Trademark Office (USPTO) third and the Korean Intellectual Property Office (KIPO) fourth. However, for NPEs, KIPO just pips the USPTO to third place, with 17% of respondents classing the quality of the Korean office’s patents as excellent or very good, compared to the USPTO’s 16%.

While all three groups of respondents agree that China’s State IP Office (SIPO) is still issuing the poorest-quality patents of the offices under review, an equal number (7%) of private practitioners believe that the SIPO and the USPTO are issuing sub-standard patents. In more bad news for the USPTO, 15% of respondents from operating companies believe that the quality of the patents it issues has declined in the past year, as do 12% of NPEs and 18% of private practitioners.

Almost two-third (61%) of those same private practitioners consider that there is a problem with patent quality in general – up from 55% of respondents to last year’s survey. And while the top reason given in 2015 for poor patent quality was pressure on examiners, this year it is the examiners themselves who appear to be the problem, with 50% of private practitioners citing patent office staffing as the primary reason for quality issues. Despite these concerns, 41% of firms still have no initiatives in place to improve the quality of the patent applications that they submit on behalf of clients.

Figure 27. What best describes your approach to patent procurement? (Select up to three options) (operating company)

Figure 28. What best describes your clients’ approach to patent procurement? (Select up to three options) (private practice)

Figure 29. Do you believe that there is a problem with patent quality in general? (private practice)

Figure 30. If you do feel that current patent quality is a problem, what do you consider to be the main contributing factors? (Please select all that apply) (private practice)

Figure 31. Does your firm have any initiatives in place to improve the quality of patent applications that you submit on behalf of clients? (private practice)

Litigation

Last year, Germany presented a concerted challenge to the United States’ long-term dominance of the litigation tables in the IAM benchmarking survey and this year the trend has continued. The growing difficulty of enforcing patents in the US courts – combined with the rising influence of the Patent Trial and Appeal Board – means that the low-cost, specialist and injunction-friendly German courts are becoming increasingly popular venues.

The one area in which the United States maintains its strong lead is in perceptions of the thoroughness of judicial scrutiny; no doubt that is thanks to the extensive discovery available there. However, when it comes to value for money, the Germans have now overtaken Uncle Sam among NPEs and private practice respondents, while maintaining a narrow two-point lead (the same as last year) among participants working inside operating companies.

More worryingly in the longer term for the United States is the confidence that respondents have in the country’s litigation system. Once again, by a narrow margin operating company respondents keep the faith with the US courts; but both NPEs and, for the first time, private practitioners give their votes to Germany. With the UPC just around the corner, that looks ominous.

Figure 32. Which of the following countries offers the best value for money for IP litigation? (operating company)

Figure 33. Which of the following countries offers the best value for money for IP litigation? (NPE)

Figure 34. Which of the following countries offers the best value for money for IP litigation? (private practice)

Figure 35. Which of the following countries has the most thorough litigation system? (operating company)

Figure 36. Which of the following countries has the most thorough litigation system? (NPE)

Figure 37. Which of the following countries has the most thorough litigation system? (private practice)

Figure 38. In which of the following litigation systems do you have the most confidence? (operating company)

Figure 39. In which of the following litigation systems do you have the most confidence? (NPE)

Figure 40. In which of the following litigation systems do you have the most confidence? (private practice)

Figure 41. Have you seen a decline in the number of NPE assertions that you are experiencing? (operating company)

Figure 42. Which country is the most welcoming to litigation from an NPE? (NPE)

EU patent and Unified Patent Court

A year on from IAM’s last benchmarking survey and enthusiasm for Europe’s unitary patent is no greater. Only 10% of operating company respondents state that they are planning enthusiastically for the new patent, while a further 34% are doing so cautiously. More are engaging, however: last year as many as 19% of corporate participants stated that they had not yet thought about the unitary patent, a figure which has more than halved this year to just 8%.

As for the UPC, 11% of respondents from operating companies and 20% of NPEs have not given the new judicial regime much consideration, and 20% of private practitioners surveyed believe that their clients have not thought about it as much as they should have done. Yet despite this apparent complacency, a significant proportion of respondents assert that the UPC will be a cheaper, more efficient way to litigate in Europe. Furthermore, the prevailing opinion of respondents from operating companies (41%) is that the new court regime will make Europe a key hub for global patent litigation. This opinion is shared by 30% of NPEs and 35% of private practice lawyers and attorneys – although the primary response from both of these groups is that it is still far too early to tell just what impact the UPC will have.

The reticence with which many respondents view Europe’s harmonised new patent system may perhaps be down to doubts that there will be anything to plan for any time soon: 20% of respondents from NPEs and from operating companies, and 18% of private practice lawyers do not expect to see the new regime up and running for a few years yet. If the United Kingdom votes to leave the European Union on June 23, they could well be right.

Figure 43. Are you actively planning for the new EU unitary patent? (operating company)

Figure 44. Are you actively planning for the new EU unitary patent? (private practice)

Figure 45. What are your views on the Unified Patent Court regime? (Select up to three options) (operating company)

Figure 46. What are your views on the Unified Patent Court regime? (Select up to three options) (NPE)

Figure 47. What are your views on the Unified Patent Court regime? (Select up to three options) (private practice)

US patent reform

Substantial minorities among operating company and private practice respondents to this year’s survey remain in favour of further patent reform in the United States, with the private practice number jumping markedly from 18% in 2015 to 31% in 2016. However, as the kind of reform is not specified, it does not necessarily follow that this indicates support for the legislative changes that Congress has been considering over the last two years. Instead, for example, it could mean that at least some participants, along with a growing number of big names such as former US Patent and Trademark Office Director David Kappos, feel that another look at Section 101 of the patent statute – which concerns eligible subject matter – is in order. This is an area that we will delve into more deeply next year.

Of course, one of the main reasons for the increasing concern around Section 101 is the fall-out from the Supreme Court’s Alice decision. The uncertainty this has caused has affected both operating companies and NPEs, with 37% of the former and 51% of the latter reporting an impact. In terms of how they have responded, operating companies are filing fewer software and business method applications, and have also conducted portfolio audits and valuations to determine the effects that the judgment has had on their holdings; a number, though, feel that they have benefited from Alice. For their part, NPEs are also filing fewer applications in the relevant fields and many believe they have been adversely affected by the decision. Private practitioners also report that clients are filing less and that they have benefited in the post-Alice world – clearly, most represent operating companies rather than NPEs.

Figure 48. Has the Supreme Court’s Alice decision had a significant impact on your company’s IP strategy? (operating company)

Figure 49. Has the Supreme Court’s Alice decision had a significant impact on your company’s IP policy and strategy? (NPE)

Figure 50. Has the Supreme Court’s Alice decision had a significant impact on your IP practice? (private practice)

Figure 51. What are your views on calls for further reform in the United States? (operating company)

Figure 52. What are your views on calls for further reform in the United States? (NPE)

Figure 53. What are your views on calls for further reform in the United States? (private practice)

Threats

A lack of resources has replaced the cost of litigation as the number one threat facing operating companies surveyed this year, compared with 2015. These same concerns are shared by NPE respondents, with a lack of resources jumping from the bottom of last year’s table to become the number one threat in 2016 (tied with the quality of patents being granted). However, there appears to be a disconnect between those managing IP portfolios and the attorneys and lawyers in private practice surveyed, who placed a lack of resources as only the third-greatest threat to their clients’ IP portfolios, behind the cost of litigation and anti-patent sentiment in parts of the world.

Interestingly, the threat of further straitened resources does not seem to reflect reduced interest and support from senior management, as might be expected to be the case. A lack of interest from the boardroom has fallen near the bottom of the table to eighth place this year, from the fourth-biggest threat posed to operating company respondents in 2015.

When resources are tight, it is essential that money is spent on safe bets and not squandered on risky gambles. Uncertainty surrounding patentability and – the root cause of much of that uncertainty – the Alice decision handed down by the US Supreme Court are both new to this year’s survey and are regarded by operating company respondents as significant threats, ranking third and joint fourth respectively.