Investors And The Need For IP Literacy

As the Theranos fiasco and patent eligibility survey show, there are always those who shortcut their diligence and invest based on inaccurate assumptions.

I have said it before and will repeat it. One of the most rewarding aspects of our current practice at KSK/Markman Advisors is our frequent interactions with members of the investment community. By and large, the people and institutions we are fortunate to consult for are intelligent, respectful of the need to solicit advice about issues (like patent litigation) that they are not themselves expert in, and keenly aware of their fiduciary duty to make informed financial decisions on behalf of their investors. But those are the investment professionals with the keen sense to solicit our (or other competent IP consultants’) advice on IP issues that might impact on their investments. It is a self-selecting group and one that is willing to invest in a comprehensive research process to buttress their investment decisions.

At the same time, however, IP lawyers receive continuous reminders that otherwise sophisticated investors can sometimes fail to approach consideration of IP issues with the proper level of seriousness. This is not an isolated phenomenon, as two recent publications suggest. The first, an op-ed on Ars Technica by Daniel Nazar (formerly of the EFF), highlights the mistakes investors made with respect to their investments in perhaps the greatest scam company of this decade, Theranos. The second, a recently published study by Professor David O. Taylor of SMU’s law school, looks at the impact of the Supreme Court’s recent case law on patent eligibility (a.k.a the patent Siren known as Alice) on investment behavior across a number of industries. We will look at each piece in turn. Critically, however, both pieces illustrate the dangers of investors who lack the appropriate level of IP literacy making investment decisions without the help of IP experts — often resulting in losses that far outweigh the modest outlay required to actually obtain qualified IP advice. Advice that could have helped avoid those losses in the first place.

First, the op-ed. While I do not necessarily agree with the premise that the Theranos debacle is proof positive that the USPTO gives out “patents much too easily,” I do think investor indifference to actually vetting the patents that Theranos had contributed to their poor investment decisions. It is true that startups gain credibility when they are able to point to growing patent portfolios built around their core commercial offerings, and there is undoubtedly a significant subset of investors who view the presence of patents as “proof” that the company’s IP is valuable.

But that lack of IP literacy is more a fault of those investors than the USPTO, since any IP lawyer hired to advise an investor on the strength of a particular portfolio would recommend that the investor take a more pragmatic approach to evaluating the patent portfolio’s value. In fact, competent IP counsel would almost always recommend caution in terms of the investor accepting as fact that said portfolio was valuable just because of the number of patents it contained, or even the fact that the patents were issued in the first place. Especially where the claimed technology offered by the company was being hailed as a technological breakthrough. While such pronouncements may excite investors and the public, IP lawyers would rightly be skeptical about such claims, and take an even more critical look at the patents as a result.

Again, it is clear that the conflagration that engulfed Theranos investors was fueled by a lack of IP literacy on the part of those investors. Many of whom chose to indulge their irrational exuberance over Theranos’s world-changing narrative over the measured approach an IP expert would have taken in terms of evaluating Theranos’s patent portfolio — diligence that if done, would have also called into question the validity of Theranos’s claims that they had actually achieved a technological breakthrough at all! If anything, the Theranos example illustrates the supreme importance of investors working with competent IP counsel before making investment decisions in companies reliant on their patent portfolios to keep out competition or as a means of validating their technology.

Likewise, Professor Taylor’s article (and subsequent guest blog on Patently-O) also supports the idea that a lack of IP literacy contributes to poor investment decisions. I recommend his work in full, but for now I just want to focus on what I think the headline finding that his survey of investment professionals yields. Namely, that investors who are IP literate behave differently than those who aren’t — and may be making better investment decisions because of their IP literacy. Focusing on investor behavior with respect to post-Alice investment in the software/Internet space, Taylor finds that investors who were at least generally aware of Alice reduced their investments in that area, while investors unaware of Alice increased their investments in software/Internet companies. Obviously, at least to me, those investors aware of Alice (rightly) concluded that patent — and thus enterprise — values in the software/Internet space were negatively affected by the challenge of proving eligible subject matter for patenting in those fields. While their less up-to-speed-on-boring-patent-development peers determined, at best, that patents shouldn’t be a driver of investment decisions in that space, irrespective of whether or not those patents actually had value. Or they just proceeded on the erroneous assumption that the patents owned by the company they were investing in were the “good ones,” thereby justifying their increased investment — even when patent values in the software/Internet space have globally come under serious question due to Alice.

Ultimately, it is a good thing that discussions of the importance of patent-related due diligence are coming to the fore. In general, investors that we have dealt with are voracious when it comes to finding every angle related to their investments. But as the Theranos fiasco and patent eligibility survey show, there are always those who shortcut their diligence and invest based on inaccurate assumptions about what a patent portfolio actually means, or how it contributes to a company’s value. The antidote to that ignorance? IP literacy in the investment community, which will only increase when more examples of mistakes like Theranos or ignoring Alice come to light. What about the stubborn investors who like to believe patents don’t matter? For them, ignorance is bliss — and that bliss will eventually prove expensive.

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Please feel free to send comments or questions to me at gkroub@kskiplaw.com or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.


Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique, and Markman Advisors LLC, a leading consultancy on patent issues for the investment community. Gaston’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at gkroub@kskiplaw.com or follow him on Twitter: @gkroub.

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