Accountability in the Patent Market Part II: Should Public Corporations Disclose More to Shareholders?
Ian D. McClure
ARTICLE

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26 Fordham Intell. Prop. Media & Ent. L.J. 417
Article by Ian D. McClure*

INTRODUCTION

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or approximately ten years beginning in the early 2000s and ending somewhat soon after the implementation of the America Invents Act (“AIA”) in 2011, all of the “water-cooler talk” was about the expanding patent market and increasing patent values. Since 2011, for business method and software patents, gene patents and medical diagnostic patents, and standard essential patents (“SEP”), the water cooler is no longer full of Kool-Aid and is viewed by some instead as a “glass-half-empty.” These types of patents currently hold a fraction of the transaction and enforcement value they once were perceived to hold because of legislative, judicial, and other recent events to be highlighted in this Article. This phenomenon has resulted in a devaluation of these patent assets in general, if even just because a chilling effect has restricted their owners’ ability—or willingness—to assert or transact for them in the current patent market environment.

A number of large companies holding vast portfolios of these types of patents, or smaller companies relying on business model protection from smaller portfolios, are public companies with corporate disclosure requirements. The requirements include an obligation to disclose to shareholders and other potential investors the value of their assets, any known risks and liabilities, and other material non-public information, including an ongoing obligation to update previously disclosed information. It is manifest that patents, their use, and enforcement affect shareholder value.^[1] It should be manifest, then, that material changes to patent holdings, their usability, and enforceability, as well as known patent risks and license requirements, constitute information that shareholders need. It is not manifest, however, that companies are under any requirement to disclose this information to current and future investors, or that companies perceive any ethical or other obligation to provide more information about these assets or risks other than blanket and boilerplate statements in their disclosures.

This Article identifies the general devaluation and/or increased risk of invalidation of these types of patents only as an example of information that could be important to shareholders. It then describes the impact this devaluation and known patent liabilities could have on corporate value, presents the requirements for particular companies to disclose patent information to shareholders and policy reasons for strengthening these requirements, and proposes that public companies could do more—or could be required to do more—to limit their risk and increase information transparency to investors.

Part I of this Article outlines the recent events that have devalued business method and software patents, gene and medical diagnostic patents, and SEPs. Part II utilizes filtered patent issuance and acquisition data to identify entities that have large or significant holdings of such patents, and explains the impact these occurrences could have on these entities. Emphasis will additionally be given to particular acquisitions by public companies, especially those that were disclosed to investors either through a Securities Exchange Commission (“SEC”) filing, press release, or public analyst call. Part III will describe the public disclosure requirements of public companies related to patent assets and the procedures that must be taken to comply with those requirements. This Part will also discuss the policy reasons for carefully considering patent-related disclosures and justifications for requiring additional disclosures related to certain patent information, including potential patent risks and liabilities, such as known licensing obligations otherwise not discoverable by investors. Part IV will review the activities of those entities identified in Part II to provide commentary on those activities in light of the requirements discussed in Part III. Part IV will conclude that current practices may not leave such companies susceptible to risk of statutory penalty or shareholder suit under current precedent and court interpretation of the requirements. Yet, there are defensible reasons for requiring additional patent information disclosures to protect shareholders. Because shareholders are now “awakening” to the importance of patent information, it may be best for both shareholders and corporations to increase the required disclosures.

* Ian D. McClure is an experienced corporate, M&A, and intellectual property transactions attorney and licensing business development professional. He is listed in the “IAM Strategy 300—The World’s Leading IP Strategists” (IAM Magazine). He holds a B.A. in Economics from Vanderbilt University (cum laude), J.D. from Chapman University’s Fowler School of Law (magna cum laude), and L.L.M. from DePaul University College of Law. Special thank you to Kelly O’Neil, J.D. and Masters in Intellectual Property Management and Markets at Chicago-Kent College of Law, for her helpful research and analysis in support of this Article.