1. Richardson Oliver Law Group
Perc ience
Whenever IP is Central
Make vs. Buy:
Patent Buying
Suzanne Harrison
Erik Oliver
Jim O’Shaughnessy
April 2012 – IPO Webinar

2. 2
Topics
Context
The make vs buy decision
• Diligence framework
• Checklist
• Ranking system
Patent buying

3. 3
Is There Really a Patent Market?
Yes! In 2011, the patent market was over $6B (includes
Nortel deal)
The naked patent transaction market is composed largely
of high-tech and medical device portfolios, however
pharmaceuticals are just beginning to enter the market
Combined with the continuing corporate interest in Open
Innovation, there is more willingness to bring in outside
patents and technologies than ever before

4. 4
When Should Companies Consider the
Make vs Buy Decision?
Synthesize
Opportunities
Capture Value
Manage Cost
Defend Position
Shape
the Future
Source: Edison in the Boardroom Revisited, John Wiley & Sons 2011

5. 5
The (Perfectly) Balanced Portfolio
• Organic Innovation (55-65%)
• Complementary Innovation (25-45%)
• Purchasing (up to 15%)
It comes from three sources
Make vs. Buy teeters on foregoing metrics
• Typically considered a buy strategy
• Dovetails completely with make strategy
Open Innovation (inbound) has a place
Make
Buy

6. 6
Sensible Strategic Goals
Market Sector Relationships
Control
Manage
Influence

7. 7
Decision Points
• Product and technology roadmaps
• Demonstrable threats
Decision is keyed to
It involves consideration of technology and IPRs
It is rarely binary

8. 8
Decision Levers – Make
• Internally resourced and IP harvested in ordinary course
Organic Innovation
• Typically internally sourced and IP harvested in ordinary
course
• May include outside human resources (e.g., industry
experts/mavens)
Complementary Innovation
• Blends make and buy
Joint Development

9. 9
Organic Innovation (OI) vs. Complementary
Innovation (CI)
This decision concerns make
It’s almost always all about time
Typical OI cycle time is months to years, depending on product and company
knowledge
Typical CI cycle time is weeks
•Good for generating IP
•Fill in gaps in patent portfolio
•Hedging
•Call options in a real option sense
•Good for attacking pivotal problems in feature set or manufacturing
•Not good for solving large-scale system problems
•OI remains preeminent
•That’s why CI is complementary

10. 10
Comparative Advantage Vantage
Being able to make is necessary but an
insufficient reason to do so
Are there others who can provide the technology
in a form (factor) suitable to my needs
Am I better off devoting my resources to make
something else because of
• Efficiencies
• Time

11. 11
Buying Patents
• Could be opportunistic rather than the immediate threat
• Could be purely defensive to avoid future threat
• In either or both cases, primarily a cost-benefit analysis
• In majority of cases, threat driven (now or later)
Issue: Immediate or impending threat
• Nothing in the existing portfolio to compensate or neutralize threat
• Cannot “invent” due to prior art
Problems
• Buy… in reality, buying time
Solution

12. 12
Common Corporate Buying Scenarios
• Assertion against you or your customers
• Need for patents time horizon: now
• Your own—made—patents not aligned with asserting company’s
business
• Seek to buy specific patents to counterassert
Handling an Operating Company Assertion
• Moving into new space want to buy patents ahead of specific need
• Need for patents time horizon: 24+ months
• Your own—made—patents not well aligned with future operating
space
• Seek to buy patents and applications for strategic positioning
Strategic (Pre-)Acquisition of Patents

13. 13
Primary Sources of Patents to Buy
• Brokers pre-qualify willingness to sell
• Brokers most likely to have prepared an evidence of use
• Know how to manage seller expectations and close transactions
Brokers
• Patents may already be heavily licensed
• Aggregator sell rationale different from operating company sell rationale
Aggregators
• Potential for needle-in-haystack search
• Potential sellers not prepared on logistics, e.g. price, approvals
Self-sourced
• Often have restrictions on who can buy and how patents can be used
Direct Corporate Sales

14. 14
Patent Market Rules of Thumb: Web Patents
Mid-range targeted
$250/patent
Strategic
$750/patent
Bulk /
Untargeted
$50/patent
Price per patent ($K)
Standard deviation is large!

15. 15
Exemplary Diligence Process:
Buyer’s Perspective
• Goal: Understand why you would be
interested
• Preliminary screen of information
against buying criteria (price, target
markets)
Triage
• Goal: Business case for buying developed and a
preliminary price
• Develop specific business case for purchase
around an EOU and specific markets
• Initial VIP rank developed
Business Case
• Goal: Refine assessment based on detailed analysis and set
bidding price
• Deep dives into legal, technical, business and valuation issues
• VIP rank refined
• Set bid, fallback, and walk based on refined diligence
Deep Dive
• Goal: Acquire patent for target price
• Legal negotiations for patents
Buy

16. 16
Buyer (and Seller) Summary Checklist
•Contact info for seller/broker
•Summary of # of patent families and # of assets
•Excel list of assets w/ families identified
•Featured patents identified
•Litigation, opposition, re-exam identified
Basics
•Historical context – inventors, company, invention(s), and the sale
•Market information –TIM and SIM
Context
•Clean title – joint ownership, universities, and/or government funding addressed
•Assignments – copies available of inventors to company, company to current holders
•Liens and licenses – is a list available? What is the process to obtain?
Title and Encumbrances
•Is there a price range set?
•Will pricing guidance be shared, if so when?
Pricing

17. 17
Buyer (and Seller) Summary Checklist
• Bidding process
• What due diligence material does seller have available – EOUs, file
wrappers, assignments
• License-back needed?
Sales process and timeline
• Are EOUs available, what is the process to obtain?
• Word for word match
• Assumptions clearly articulated
EOU
• Verify whole patent family is being sold together
• Standards applicability
Other

18. 18
VIP Ranking System
V – Volume (Markets)
• What is the market for
the products identified by
“I”? Multiple markets
may be identified
• Ranking: Size of market(s)
in dollars
• Note, in the initial
ranking the total
impacted market (TIM) is
usually evaluated. As the
ranking is refined, the
serviceable impacted
market (SIM) is usually
evaluated.
I – Infringement
• Can we generate an
evidence of use (EOU)
mapping each element of
a claim to a product?
• Ranking:
• 1 – None
• 2 – Future infringement
likely
• 3 – EOU likely
• 4 – EOU complete
P – Prior Art and Patent
Process
• Have we investigated and
are prepared with
answers to the questions
licensees will raise about
the patents (e.g.,
obviousness, prior art)?
• Ranking:
• 1 – Could not answer
questions
• 2 – Questions
identified, but not
answered
• 3 – Questions
answered
• 4 – Litigated (patent
has been successfully
litigated)

19. 19
VIP System Advantages
• No more “good” vs “bad” patents
• Provides a shared terminology to describe the degree of qualification and amount
of diligence done-to-date
Common terminology unhelpful
• Initial market data is refined throughout the diligence, e.g. generally move from
TIM-to-SIM
• As a package is evaluated and assumptions are tested, the rank should be
adjusted
Rankings are continually refined
• Rank does not set price or address all diligence issues, e.g. encumbrances
• Possible buying filters:
• Minimum V, e.g. V > $1B
• Only patents with an EOU, e.g. I = 4
Ranking serves to help filter decision

20. 20
Two Package Intake Problems
Hodgepodges and Critical Mass
• Costly to review
• Interesting packages swamped by uninteresting ones
• Difficult to filter out uninteresting packages
Inconsistent data in too many formats
• Lack of seller response to buyer format requests
• Critical mass required for a common format
Individually buyers cannot drive a common format

21. 21
Deal Consensus
• Package checklist format
• Patent asset list format
Baseline common format
• Defines minimum acceptable information
• Higher tiers enable sellers to differentiate the
offering
Multiple tiers of package information
Learn more: http://www.dealconsensus.com

22. 22
Summary
• Organic Innovation (OI) or Complimentary Innovation (CI)
• In time to meet roadmap or threat drivers
• Entirely internally or using outside resources
• Open Innovation/Joint Development
• Does comparative advantage tip the scale
Can I make?
• Lack resources to make
• Can’t make time
Must I buy?
• Diligence framework
• Checklist
• Ranking system
How should I buy?