IP securitization: the new hot thing in Europe

Intellectual property securitization has had a promising history- from the initial excitement over Bowie Bonds, which securitized David Bowie's song catalog, and other early deals, followed by a recent lull, during which it was thought the idea was dead. Recently IP securitization has been revived and the heros are the financial institutions and IP merchant bankers. They are basically retail products and franchises, nowadays mostly patents and trademarks rather than copyrights. Goldman Sachs closed a $200 million IP securitization for IHOP backed by its intellectual property and franchising assets. Lehman Brothers leads an IP deal for Domino's Pizza; it aims to raise $1.85 billion. Dunkin Donuts really got the IPO ball rolling last May with its well-received deal. All of this being fueled in part by hedge funds and the liquidity they bring. We'll likely see a lot more deals. With the marketplace shifting to a more knowledge-based, or "IP-centric," economy and major investment banks testing the waters, IP securitizations are quickly changing the financing landscape and are reviving the possibility that this type of arrangement will become mainstream. Securitization normally refers to the pooling of different financial assets and the issuance of new securities backed by those assets. In principle, these assets can be any claims that have reasonably predictable cash flows, or even future receivables that are exclusive. Thus securitization is possible for future royalty payments from licensing patents or trademarks (or compositions or recording rights of a musician). At present, the markets for intellectual property asset-based securities are still rather small, as the universe of buyers and sellers is limited. But if the recent proliferation of IP as the new asset class (auctions, IP merchant bankers, and so on) then it is only a matter of time before all concerned will develop greater interest and capacity to use IP assets for financing business start-ups and expansions. As more cash flows are generated by intellectual property, more opportunities will be created for securitization. New player in the field is IPEG, Europe’s first IP merchant banking. They are in the process of developing their own IP securitization product, to be launched soon.

Japan has toughest patent system

Japan today has the toughest patent system in the world in terms of the odds of a patentee winning a patent trial against an accused infringer. Japanese trial courts hold against patentees in nearly 90 % of all cases, according to statistics released by the Japanese attorney Eiji Katayama at the “Fordham Conference”, the law school’s Fifteenth Annual Conference on International Intellectual Property Law & Policy that commenced on April 12. For the year 2006, Mr. Katayama reported that for the Tokyo and Osaka District Courts 33 out of 37 final trial decisions ended with a finding of non infringement. Of the 33 patentee losses, two-thirds were decided on the basis of invalidity (22/33) while more than 85 % of the invalidity determinations were keyed to a lack of an inventive step or obviousness (19-22).

During the panel discussion at the Fordham Conference, the point was made that on appeal, there is generally an 80% affirmance rate. Prof. Obuchi explained that many of the currently litigated patents had been granted many years ago under a much lower standard of patentability. He indicated that this was one reason for the low rate of patentee success. Mr. Katayama noted a disparity in claim construction methodologies for infringement and validity. The matter is serious enough that it was to be resolved by the Intellectual Property High Court by its Grand Panel division. But, the test case – Toshiba v. Hynix – was ultimately settled before a decision was reached.

As noted by Prof. Tetsuya Obuchi at the Fordham Conference, many Japanese patents enforced today are from an earlier era which had lower standards of patentability than today, thus in part explaining the very low success rate for patentees in their infringement suits. A helpful perspective is provided by former Deputy Commissioner Shinjiro Ono, who has been responsible much of the recent push for higher quality examination at the PTO.

prof. Hal Wegner

Is DRM dead?

Now EMI decided to deliver “DRM[1]” free music, (no limitations once the music file has been downloaded) it seems that everyone in the technology and CE space is going to take a wait-and-see attitude for the next few months. It is highly unlikely that any big player in the field like Philips will do anything in the area of encryption-based DRM in the very near future.

On the other hand, this could be a huge boon for watermarking. Check DMRC – it spiked mildly (3%) on the news, then retreated somewhat – although only a small percentage of DMRC’s revenue is media related (as opposed to government and other applications). Still, if you were to invest in individual securities, buy DMRC right now. (There are money managers who deal with this).

So we take it DRM is not dead. One fact that got lost in the recent hoopla is that DRM-ed tracks from EMI are still going to be available on iTunes. So, it’s about offering consumer choice and responding to the market, which is what DRM is supposed to be about. For companies like e.g. Intertrust that have DRM technology for all types of content, it looks that it’s not going to make much difference, though they are most likely going to have to cut their royalty rates for music devices.

However other companies may do less well, like e.g. SDC of Switzerland, because they are music only –good news for Michael Bornhaeusser because he cashed out in time (SDC was recently, and quietly, acquired by a US company called PacketVideo that makes software for media applications on handheld devices).

[1] Digital Rights Management