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There are several possible goals for an IP development program, including to facilitate financing, to prevent competitors from entering your market niche, or to generate licensing revenues. Sometimes, however, changing business strategies leaves a company with a legacy patent portfolio that is not applicable to any currently planned product line. At that point, a write-off of the intellectual property investment is not necessarily required. It may be sold to another entity; it may even be a home-run profit center in itself. Take this case. ClickCo (a pseudonym) was a zippy little 1990s startup with four employees. It had big aspirations and a sparkling business plan to develop algorithms for use in wireless widgets. Wireless widgets were hot with the venture capital community that month, and ClickCo obtained $5 million in first-round funding. On advice of its venture capitalists, ClickCo invested money in an attempt to amass a patent portfolio for its algorithms. At the time, the patent applications were somewhat controversial because they were filed before In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994) before the promulgation of the PTO guidelines for software inventions (” Alappatguidelines”), and before the PTO’s surrender in its struggle against software patents. ClickCo’s technology attorney, however, was convinced that the law was moving in a pro-software patent direction and that there was adequate legal precedent to file the applications. Early priority dates, he felt, were essential in the fast-moving telecom software area. Eventually, ClickCo obtained a half dozen U.S. patents and developed a unit of six design engineers to develop the wireless widgets. Meanwhile, the manufacturing industry for wireless widgets consolidated so rapidly that the four major players obtained tremendous economies of scale, making it apparent that a new entrant, even with superior technology, could never make it up the steep economies of scale curve in time to compete. Under some duress from its venture capitalists, ClickCo decided to terminate the pursuit of the wireless widget market and place its bets on a developing industry involving software for TCP/IP protocols. IRONY OF SUCCESS Fortunately, the ClickCo TCP/IP software business took off. ClickCo, however, faced the irony of successful growth companies: Its exploding sales provided tremendous income, but as its working capital expanded it actually had negative cash flow. In cases of acute success, booming income equals negative cash flow. All that profit was killing them. In need of a large capital infusion, ClickCo planned a $12 million third-tier private placement to prepare for a follow-on IPO in about a year. The $12 million IPO would represent a substantial dilution of the shareholders’ equity. Instead, ClickCo realized that it might be able to sell the legacy widget patent portfolio and related widget designs, together with the engineering team, to one of the huge consolidated players. (Without the patent piece, the package would not be worth much; it is hard to sell design ideas that buyers and competitors can copy for free.) ClickCo would in effect become a royalty owner or a recipient of a one-time prepaid up-front royalty. Sure enough, ClickCo obtained a buyer for its widget IP portfolio and a new employer for its design team. The overall payments from the deal, assuming certain sales figures were hit and benchmarks met after the sale, would total approximately $35 million over two years. This obviated a third-round private placement (and dilution of shareholder equity) and permitted an IPO on schedule a year later. Furthermore, since only $12 million in working capital was budgeted to get to the IPO, ClickCo actually ended up with more capital than it had originally required. This extra capital allowed ClickCo to take advantage of an opportunity to acquire a large patent portfolio from an erstwhile competitor. This portfolio was very relevant to ClickCo’s TCP/IP strategy, but of no further use to the competitor. (Talk about a change of business plan: The competitor had been heavily invested in its main line of business, Buggywhips.com, which had tanked the company into a Chapter 11 liquidation. The TCP/IP product line was not the cause of death, and was a relatively minor line of this large company. However, just as you cannot take half a bath, you cannot file half a bankruptcy, and the whole company tanked.) ClickCo bought the TCP/IP patents from the trustee in bankruptcy at a substantial discount. The current buzzword for using intellectual property as a source of income or capital, instead of simply enforcing it against competitors, is called “monetization.” The origin of this usage is that it is the process of turning intellectual property into “money.” This is not the meaning of monetization that any traditional economist might have in mind, but it gets the point across. Stephen Glazier is a patent and corporate attorney at Pillsbury Madison & Sutro LLP, in Washington, D.C., and the Dulles tech corridor. He is the author of “e-Patent Strategies and Patent Strategies for Business.” He can be contacted at [email protected].

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