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To begin, we return to a theme introduced in Chapter Ⅰ. You need to think about your businesses’s collection of IP rights as a portfolio. This means that any single patent, trademark or other right is only important in that it forms part of the entire holdings of the company. Though in some cases, a single right (a key patent, for example; or the basic name and logo trademarks on a well-known brand) might be very valuable, good strategy requires that a larger portfolio be built. The primary reason is that each IP right has weaknesses and limits; by building a portfolio, you increase the chance that one or more of your rights will be effective at protecting or enhancing an important company revenue stream.
Another reason to think in terms of portfolios is to plan for the future. You think about each IP right as being like the special type of contract known as an “option.” In the law of contracts, an option means the right to do something in the future: to buy a piece of land at a fixed price, for instance; or to sell shares of stock at a certain price on or before some future date. Real estate developers use land options to fix the price of a piece of land before development begins. The developers can then try to line up leases for the development, get bids on construction, etc. The land option means the developer knows in advance what the price of the land will be. If all the elements of the development deal come together, the developer will “exercise” the option and buy the land. If the development deal never comes together, the developer will not buy the land - i.e., let the option “Lapse”。
IP rights in a portfolio are like options. You can for example obtain a series of patents that cover different future possible ways a current technology might evolve. In the case of SSP, the tail light cover company, you might file patents covering injection molding using different types of plastics that have recently been developed. If there are three or four new plastics, you might file three or four related patents. If one of these plastics proves to be cheaper, more durable, or capable of being molded in new and different shapes, the patent on that particular plastic might become valuable. When filed, before you know which of the new plastics will end up being superior, the group of patents all have equal potential value. The one patent that does prove valuable might well be worth the trouble you went through to file all the patents. In this case, you might “exercise” the option represented by this patent - by using it in the manufacture of light covers. The point is that the portfolio gives you choices. It helps you stay flexible depending on future developments. You are in a position to protect future revenue streams even without knowing for sure which new product version or technology development will be the most profitable one.
There are additional reasons to think in terms of portfolios. For example, in some industries, companies that hold many patents hold periodic patent licensing negotiations. The purpose is to arrange a “cross-license”: an arrangement where each of the two companies grants a license to all its patents to the other company in the negotiation. In these arrangements, it may help to have a large portfolio. Though each side tries to verify the quality of the other company’s portfolio, sheer numbers can be helpful. If Company A has many more patens than Company B, Company B may pay some money to Company A as part of the cross-license, while Company A pays nothing.
A patent portfolio may also be important to a company looking to attract an investment from a private equity (PE) or venture capital (VC) firm. PE and VC firms are highly sensitive not only to the business model and leadership team of a target company, but also to the risks involved in an investment. Sophisticated PE and VC firms know that effective IP portfolios can help protect company revenue streams, which reduces some of the riskiness of an investment. In addition, a company that does not succeed in the product market may still be worth something if it holds valuable patents. Failing companies, or companies making a drastic change to their business model, often sell patents to raise cash. In other words, a patent portfolio might increase the “salvage” or sell-off value of a company.
Portfolios are also important for companies that are being targeted for acquisition by another company. As we discuss later in this Chapter, mergers and acquisitions (M&A) usually involve a good deal of study of the assets and liabilities of the company that is being acquired. The buyer wants to know what it is getting. A large and well-managed patent portfolio can be an important part of the deal for an acquiring company. In fact, there are examples of M&A deals where the patent portfolio was the only asset the acquiring company real care about. The simple point, then, is that an effective patent portfolio can add to a company’s value in a number of important ways.
Finally, portfolios are sometimes helpful to companies that are heading toward an Initial Public Offering (IPO). Investors may place some value on a good portfolio, raising the company’s value and helping support a high price at the IPO stage. More importantly, it is well known that a company heading toward an IPO is vulnerable to litigation or the threat of litigation. Litigation hangs over a new company like a dark cloud, and it often drives down the IPO price if it is enough of a threat. So a company can threaten a pre-IPO company with patent litigation, asking for a large monetary payment or even some of the IPO shares. (Yahoo used this tactic prior to the Google IPO, for example.) A patent portfolio can help prevent these pre-IPO patent infringement suits. As explained more fully in Chapter Ⅵ（“Defensive and Offensive strategies”), a large portfolio makes it more likely that the pre-IPO company can respond to a patent infringement suit by another company. The threat of litigation is met with a counter-threat: the pre-IPO company can sue the other company (the one threatening litigation) with patents from the pre-IPO company’s own portfolio. The two threats may cancel each other out, and the IPO can go forward without any patent litigation to reduce the IPO price.