The activities of such companies as Texas Instruments and IBM make it clear what a strong portfolio of intellectual property rights can mean to the bottom line.
In 1997, Texas Instruments purchased loss-making Amati Communications for $450 million, 35 times the $13 million worth of sales the acquisition had made over the previous 12 months. In doing so, Texas Instruments’ chief executive officer, Tom Engibous, got his hands on a patent portfolio centred on digital subscription lines, the technology behind modems that offer high data capacity over ordinary phone lines.
Nowadays, DSL modems produced anywhere in the world contain chips based on designs licensed by Texas Instruments, so giving the company a valuable stake in a market that is set to generate $4 billion of sales this year.
At IBM, a licensing business that was worth $30 million a decade ago is forecast to bring in $1.7 billion for 2001 alone.
Smart investors look at these companies, and others like them, and realise that it is a company’s ability to create, protect and then effectively exploit intellectual property that has emerged as one of the single biggest factors in determining whether companies in the new economy will prosper or fail.
The importance of intellectual property issues to so many of the transactions now taking place in the world’s capital markets is affecting the way law firms are advising their clients on this type of work.
Alongside the traditional host of corporate financing specialists fielded by law firms, a growing number are finding space for their intellectual property lawyers. Meanwhile, the firms are calling them in to work on deals at a far earlier stage than has ever been the case before.
WestLB Panmure is one bank that has realised the importance of the intellectual property assets owned by the companies with which it works. WestLB has undertaken more issues, and acted on more primary and secondary fund raisings in Europe’s life sciences sector than any other bank.
Last year it was involved in 19 financing deals in the sector, which covers industries such as biotechnology and pharmaceuticals, worth a total of e1.14 billion.
Juliet Thompson, a director in WestLB’s Life Sciences Group is adamant that intellectual property issues can make or break a deal.
“The patent position is critical to the success of a company,” she says. “When we are working on an IPO, for instance, if the patent position is not strong, we would have very serious reservations about taking the deal forward,” Thompson says.
Acting for WestLB Panmure in a number of the transactions it has brought to market has been City of London law firm Gouldens. Simon Chalkley, intellectual property partner at the firm, says that the demands of clients such as WestLB’s Thompson are changing the way his firm advises on deals.
“It is increasingly the case that I am asked to attend the first all-parties meeting at the bank to discuss the particular fundraising. It is an important meeting to attend because it ensures right at the outset that intellectual property issues are on the agenda.” says Chalkley.
Speaking of the work his firm does with WestLB Panmure, he says: “They take intellectual property extremely seriously and consider our role in that aspect of the corporate finance transaction to be key.”
This is something that WestLB’s Thompson readily concedes: “We ask our lawyers and patent agents to work very closely with a company to find out whether its patent position can be attacked, to ask whether there are other companies which hold patents which may impinge on the market, and to assess whether there is freedom to operate.”
And according to Chalkley it is the freedom-to-operate issue that lawyers who are not specialists in intellectual property may easily overlook. “There is not much point in having a wonderful patent portfolio to report on in respect of certain aspects of the company’s technology if other key aspects cannot be exploited because they infringe on third-party rights. It is in this respect that difficulties often arise,” Chalkley says.
The specialized nature of the advice that is increasingly being sought by clients convinces Ian Craig, head of intellectual property at the London offices of global law firm Dorsey&Whitney, that intellectual property lawyers now have a pivotal role to play in many transactions.
“These rights are essentially negative in nature,” he says. “They are tested when someone infringes them. It is so important that lawyers have an angle on the agreements they are being asked to advise on to ensure that they can stand up to the scrutiny they will be put under in court.”
This means knowing intellectual property case law and understanding how it may affect the deal: “If you do not know about a case you may let something pass. We still see some really big firms in the City that produce documents which do not fulfil the requirements of the litigators. As a result, the intellectual property in question could turn out to be worthless.”
Koos Rasser, managing partner of the London office of US firm Howrey Simon Arnold&White, agrees. Before joining Howreys, Rasser was the chief patent counsel of Procter&Gamble. He thinks it is imperative for banks not to assume that just because intellectual property rights are important to a company, the company is doing a good job in looking after them.
“It is not enough to know that a patent portfolio is healthy, valid and in force,” Rasser suggests. “This only tells you the portfolio is there and it is being managed. It does not tell you how good the portfolio actually is.” It is this advice, according to Rasser, that only intellectual property lawyers are in a position to give.
“We can go in and do a complete analysis,” he says. “The value of a patent can vary tremendously, depending on how it is written and its scope of coverage.
“It is vital to compare the patents with a company’s products, to see how easy it would be to patent around the portfolio and end up with similar products which could be sold into the same market.”
Rasser continues: “This is something that general corporate lawyers would not be able to do, because only someone who understands patent law and has a grasp of the technology in question can assess how close a competitor could operate to a patent without impinging on it.”
For many forms of corporate financing there is no legal requirement for in-depth examination of the intellectual property issues involved. But, says Gouldens’ Chalkley, if a bank, or a company, thinks that way then it is missing the point.
He says: “If no freedom-to-operate searches are done and then, a little time after the fundraising takes place, a patent infringement action is instituted against the company on a patent which if a third party patent search had been undertaken would have been revealed then you can quite easily see how the bank and its legal advisers could be heavily criticised for not having required that investigation to be done.”
It is a view shared by WestLB Panmure’s Thompson: “The last thing we want is that six months after an IPO a serious patent issue turns up. People can only be expected to invest on the understanding that they possess full knowledge.”
