Managing IP–Aerospace Industry Perspective, Scott Asmus

In this episode of Innovation Capital

Deputy Chief Counsel Intellectual Property at BAE Systems, Scott Asmus, speaks with PatSnap’s Founder (West) & VP New Ventures, Ray Chohan.

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Episode highlights

• In 2020 companies were posting that over 90% of the value of the company was in intangibles. Goodwill and IP.
• 70%-80% of the patents granted in 2020 were software-related.
• “He who owns the data owns the world”.
• Patent valuations are exceedingly difficult.
• Get our #1 Amazon bestselling eBook, The Definitive Guide to Connected Innovation Intelligence (CII). In this white paper, we explore what CII is, who it’s for, and how the world’s disruptors are using it to win in hyper-competitive markets. Download your FREE copy.

The experts

Episode transcript

Ray Chohan: Scott welcome to Innovation Capital. I’d love to kick off with your backstory. I know you started as an engineer before you ended up in the wonderful world of IP. How did you end up where you are?

Scott Asmus:Good morning, Ray. I took a long and twisted path to become a patent counsel. I do believe you’re the sum of your life experiences so it’s good to experience a lot and I tend to use every bit of that knowledge and experience in my day-to-day operations. I wanted to be a pirate when I grew up. I went to a maritime school, and I got a Third Mates license to ship, but there were no jobs. I took path number two, electrical engineering and I wound up working first at Grumman Aerospace on the F-14D radar system. That was the Tomcat great plane. As I started my career there, I then went to Raytheon Technologies now and started working there. I worked on the Hawk system, which is the battery system that was involved with the scuds during the first Gulf War.

I also worked on the Amiram radar subsystem assemblies. From there I went to analog devices and worked there for a year on the 8608 RF log amp device. Mitchell log amp. It was the first opportunity to be in the commercial world and worked with concurrent engineering. It was very interesting working on design manufacture and testing at the same time. It was truly a great experience. Then for some strange reason, I decided to go to law school. I went up to Franklin Pierce Law Center up in New Hampshire and wound up getting a JD and an LLM, which is like a master of IP component, and started my private practice, Maine & Asmus up in New Hampshire. I had a great run for several years in the private practice area and doing what comes about with a lot of independent ventures.

We get some core corporate clients, but the real fun is working with independent vendors. They are a lot of fun. They’re very passionate about their creations and their inventions and trying to help them along the process to become profitable was very rewarding. Many of them came from a lower money profile than our larger corporate base. It was interesting working with them.

After about 10 years, I felt the itch to try something new and I decided to go in-house. I ended up at GE Global Research, which is in the state of New York. I had a great experience working there. At the time, it had the highest percentage of PhDs in the United States.

It was an amazing place. Think Willy Wonka but instead of developing candy, they’re developing technology. It was a great opportunity to work with, once again, crazy inventors coming up with all sorts of things. There were interesting conversations when you go to the lunchroom and you see people writing on napkins, moving around salt and pepper shakers, and trying to design something. I was there for about 10 years. You’d probably see my modus here is 10-year cycles. I saw an opportunity to try something new and I decided to try an opportunity as the Chief IP Counsel at BAE Systems, and I started here about six years ago. It’s been a long and tortuous path of things, but that’s where I am right now.

Ray: That’s fascinating. Did you spot something as an engineer on the ground level, such as a particular patent that ignited the flame about IP from an engineering standpoint?

Scott: I was an engineer at Raytheon, and I was sitting there on a bench working on the rigs and test systems. I saw down the stream, there was a guy next to me who had been there 40 years and he was doing the same thing. I thought, “This is not for me.” So, I started looking at other opportunities. And someone had mentioned that they had just gotten the patent and I’m like, what is that? I started researching a little bit. It took a while for me to figure out that’s what I wanted to do. I talked to the in-house counsel at Raytheon at the time I drove down.

He gave me the gracious opportunity to converse with him. And he said it was a great career. He said if you like engineering and playing with technology, this is it. You see different technology. You’re on the leading edge. You’re filing the patent applications before the public will ever see this technology and that was intriguing to me and I thought if this is something that I can derive value from and also create an impact, I think it was the path I wanted to take. I went ahead and quit my job and went ahead and went to law school.

Ray: And looking at things from a 30,000-foot overview, we always hear about the common headlines where IP as an asset class forms 80% of the value of the S&P 500, I think in 2021, Scott. It’s now at 90% is all the intangible market cap. Patents, software, data, trade secrets, et cetera. But it’s still interesting that we’re still on this journey of organizations, be it the defense sector, automotive, semiconductor, and appraise wide understanding of the value of that asset class. What are some of the challenges you’ve observed yourself to get IP in the boardroom and get patterns understood within the market-facing teams, the marketing organizations because I still feel Scott, we’re still on that journey here at PatSnap? We’re still trying to beat the drum about educating the market and it’s not easy. I was curious, firstly, what do you think the challenges currently are and where do you think it will be in three to five years, Scott?

Scott: This is a great question. And you’re right. If you look at any of the data coming out from various sources related to what people put on their financial statements, how they’re doing M&As. If they’re all putting a huge value proposition on their intellectual property, and as you said, I believe in 2020, 2021, some of the companies were posting over 90% of the value of the company was in the intangibles. That’s the Goodwill and the IP being the dominant components of that. Companies like Facebook, for example, I mean, what do they make? Google, I mean, they’re not producing hardware devices. We normally think in that context and yet the valuations are through the roof. Whereas if you look at the listing of companies that are now lower, GE, ExxonMobil. Companies with hardware infrastructure are much lower valued than these companies that have no products.

I think this is a shift that came very quickly and I don’t think the market has adjusted to it yet, neither has the board of directors, which tend to be the more stoic, conservative types that may not always see where the value proposition is. I mean, who would’ve thought Elon Musk would be where he is right now, or Jeff Bezos as an example of how they rose to such value and importance. It is a struggle to convince members of a higher level of the leadership community as to how intellectual property is such a valuable component of everything they’re doing. It’s one thing to state that, but in other words, to prove it. And so I try to find examples in the industry. I think a few years ago, Raytheon, which was a defense company, a competitor of ours merged with UTC United Technologies Corporation.

And it was called a merger of equals and everyone was scratching their heads because Raytheon was much smaller than UTC in every respect. But what Raytheon did was they posted that the value of their intellectual property assets made them appear and they posted a phenomenal value to that component. And therefore it showed the value proposition to UTC to make them appear. That’s a great example of how you can start seeing where this is coming into play. And I try to find examples like that and try to show people that that is accurate. Those are real numbers. It’s not like Bitcoin, these are real numbers and people are using them to their advantage.

Ray: In terms of getting IP in the boardroom, getting understood and getting muscles behind it in terms of internal political capital, where do you think we are on that side of things? I think it’s very much a people-based thing as well. In terms of innings, are we in the first innings, or do you think we’ve progressed?

Scott: I think we’re past the first inning, but we’re not near the home stretch yet, which is the seventh inning and beyond. It is one where I think we’re starting to see penetration as people move into the boards and the higher levels that can see the significance of the intellectual property assets. And as you mentioned, a lot of it is a cultural thing. You get a lot of people that, you know, oh, we’ve never worked with IP before and why would we start now? And why would we do things differently than we’ve always done before? Has the world changed? No, you didn’t take a brilliant mind to see that things are very different now than they were two years ago, five years ago, ten years ago. I think it’s just a recognition that they’re slowly catching and coming up to speed on.

But I think there’s a lot that can be done, and it’s not just the high level. I find that cultural changes occur at both tops and bottoms. I think it’s important to understand that when you’re talking about IP, you start creating a clear message of what is intellectual property, as a defense company, as an example. What do you do with it? In trying to explain to people that, if you ask most people, what you do with IP, they are like, you license it, and they can’t go any further than that because they’re not recognizing the other components to where intellectual property plays an important role in a company’s success or failure. I think that one is, you have to start coming out, and it’s going to vary from company to company, but the message is clear and succinct as to what is IP and why it is valuable and where are we using it. I think the communication side of things and the marketing have not been great on intellectual property. And that’s what I think a lot of companies need to start some focus on.

Ray: Interesting you mentioned that obvious licensing use case and that drum is always been within all industries, that companies of all sizes, as a low hanging piece of fruit in terms of leveraging your intangible assets, but you briefly mentioned it, there are other low hanging fruits out there, which isn’t discussed, isn’t talked about. What does that look like? Licensing is the obvious one, which everyone runs towards because it’s quite obvious to understand, but what other dimensions, Scott, do you think are compelling and organizations are not executing on and leaving those chips on the table?

Scott: I think the dominant one for most companies that are practicing is risk mitigation. We have non-practicing entities, you can call them patent trolls’ but non-practicing entities out there and just general litigation issues out there. In the US litigation, patent litigation especially is extremely expensive. We have had just recently this last six months, there was a $2 billion verdict in the semiconductor industry. Those are big numbers and those are off the bottom line. I think that’s caught a lot of people’s attention. You look at, and some people call it mutually assured destruction, but with peers, at least, you want to have a robust patent portfolio. You also want to have a robust patent portfolio to keep others from practicing in your space. This is why you want to patent and have the first rights in your particular technology to make your claims cover what you’re doing because it’s important to be able to have the freedom to operate.

You want to make sure that you can sell your product and make that money. There’s an awful lot of litigation going on in the US. I think the rest of the world doesn’t have that anywhere near the volume that we’re getting. And I think some recent statistics show that in the patent space where these technologies are, 90% of the patent litigation is from non-practicing entities. They’re venture-backed, their private equity-backed, buying pools of patents, and then asserting them against companies. It’s a big factor here. And that’s why I think a lot of companies are looking very seriously at figuring out how to control that issue. And one of those is to patent your stuff and get the rights to it as best as you can and keep other people out of it. And I think that’s going to be the continuing evolution of what people do to counter the non-practicing entity. The lumber we are having here in the US.

Ray: Scott, on the MPA front in the US market, are we seeing a resurgence? Because I thought 2017 onwards it was declining and companies were getting their arms around the risk and risk mitigation side of their IP assets. It wasn’t as frothy as it used to be back in 2012, 2013, and 2014 for the MPS. Have things picked up where there’s more action now and price action around mitigation, are things looking back to 2012, 2013?

Scott: It has. Your data is outdated, it’s frothy again. Yes, we’ve seen an upsurge and uptick in activity and also sophistication. Immediately after, we call it the Alice decision here in the United States, but a decision that needed something more around certain types of patents, a lot of the patent trolls’ assets were fairly weak and they would be quickly kicked out using various mechanisms. The parties’ reviews in the patent office or litigation were being crushed. And you’re right. It ticked down markedly, dropped in a certain timeframe, but the patent’s sophistication got better. You have now the patents that are passing the bar in terms of doubling over post-Alice considerations and the sophistication using tools and analytics, as well as being funded now by private equity, which was a new dilemma or wrinkle here is that it’s no longer just some, you know, an old retired patent attorney that has a few patents in his coffers and he’s throwing them over the fence.

These are well-funded sophisticated enterprises that are buying bulk patents, screening those patents, using analytics and tools, and asserting them. And we’ve seen in the last year and a half to two years, a very significant increase. And there’s also a historical trend there to watch. During the last great downturn, we had in the 2008 timeframe, right after things started improving. There was a massive escalation in the amount of litigation and we’re thinking that’s going to be similar to this downtime we had as companies pare their losses because now they’ve gone through that period, they’re pruning. Large companies are pruning big volumes of assets and selling them off and who’s the most likely purchaser? The private equity enterprises. Kia just announced 10 or 20,000 patents that were selling off in the 5g space and the communications area. We’re seeing that as a factor, that’s going to probably accelerate the amount of patent non-practicing entity litigation that’ll occur. And everyone’s trying to figure out and prepare for that.

Ray: Interesting. You now have got this wave because PE has been super active right in the last seven, eight years. They’ve got all these assets on their balance sheet and now they’re being proactive and partnering with MPEs and thinking about how they can monetize and optimize that asset. So, wow. We never thought about it from that perspective. It’s like it’s going to be a busy next two, three years because that parking lot of M&A activity is big and I’m guessing there are so many IPs on those balance sheets across so many different industries where you’ve got these PE houses rubbing their hands together, thinking, okay, how can we generate some yields?

Scott: It is more difficult now too because we’re talking about litigation here in the software space, whether it be quantum or 5g or something of that nature, it’s not a physical thing where you can go to a jury and say, widget A and widget B, and see the differences. Often it is a lot harder to discern, it’s a lot harder to do clearance and freedom to operate opinion because the claims can be somewhat ambiguous. I think it is going to be an uptick and Europe has been spared of this to some extent, and the loser pays model that we have there or you guys have there. I think you’ve managed to circumvent some of this. But I wouldn’t be surprised to see an increase there as well. Once again, these are sophisticated users with better tools than they were in the past. I’m assuming they’re going to be able to predict which ones are going to be successful in the marketplace in a litigation context. And I think you will see litigation start happening on that side of the pond.

Ray: It’s interesting. A couple of moments ago you were using Amazon and Facebook as interesting examples, where the actual users are the product and the values accrued through data and network effects, hence their insane market cap, right. And so much bullishness around their growth compared to classic more analog-based businesses. And then we’re now seeing another big can of worms, which I’d love to unpack with you. Can you briefly touch on it? How do you manage IP in the world of software because software is eating everything, even traditional industries?

I was in a conversation the other day with a really traditional chocolate manufacturer and their new chief executives, talking about data and machine learning. I was just trying to get my head around, okay, you’re going to be deploying that technology within a traditional chocolate manufacturer, but he had a clear vision on how he was going to go about doing that. We are seeing software literally eat every market, even non-obvious markets.

Is this changing your job a lot in terms of your day-to-day, in terms of the knowledge base you and your team have to build out and how do you see the future role of it, of chief IP counsel in a world where software is literally eating everything? What are some of the key things you have to get your arms around and upskill your team around?

Scott: It’s not just my team. It’s also my outside counsel. So you’re right. It is one where the skill sets need to be vastly improved in some areas and making sure you understand. Filing a software application, it’s not like filing a golf ball application. The golf ball application is much more physical and understandable. The software has various tangents to it and the Alice decision I mentioned earlier, the Supreme Court decision that really focused on software in general. They said something more, which is not the best clarity that they provided. But what it means is that when you find the software application, you need to be much clearer and clarify what you mean by the modules that you’re putting in there. If it’s something that’s doing some functionality and you’re describing it in terms of blocks, you need much more definition.

I’m going back to years ago when software first became patentable. I used to include pseudo code or actual source code in the application to the extent I could to show the functionality and very clearly defined it. I see that coming back into vogue to some extent in terms of being able to clearly show and delineate what the software is doing and being very specific as to the application space. You can’t just claim some software that does some data processing. You need to define what is the data being processed. What is it doing and what is the outcome of that process? It’s a very different field than what it was years ago when software was first considered patentable and those patents are now gone. The sophistication is there. The applications for software are much longer and much thicker than more pricey.

Working with your outside counsel to gauge that and make sure that you’re providing adequate resources to that. And also we tend to very closely scrutinize the claims on the patent applications because that’s the metes and bounds of protection. We can’t shoot for pie in the sky type of claims in software. We have to be very narrow and specific. And then the business case comes up and says, well, those are too narrow, I prefer to keep them as a trade secret. We’re seeing a great balance now between trade secret protection and the patent side in software. And in some cases, the claims will be narrow enough that it’s just not worth it. One of the tricks in tools that we do in software, in the US we have the option of filing what’s called a non-publication request at the time of filing.

If we’re filing a software case, and it’s one of which we are not interested in international protection, in some cases that may be, but if we’re only really interested in US patent protection, we filed a non-publication request. What that does is we proceed with our patent application, but it is not published at 18 months like most patents. You go up to the point of allowance and issuance, and then you decide whether or not to pay the issue fee. You look at those scope of the claims, assess if those claims are too narrow that they’re not going to be worth getting granted, we’ll keep it as a trade secret. We’ve been using that on a lot of our software cases where we only want US protection and we wait until the issue point. We look at the claims set and we make a determination of whether to keep it as a trade secret if we can, or we go ahead and patent it with whatever narrow claims that might be there.

Ray: On the software side, Scott, what’s the direction of lay of the land versus trade secret, actually filing and publishing a pattern. What does it look like and where do you see the future?

Scott: As I mentioned, I think to some extent the patent application is getting much more detailed than it used to be. Years ago, you could gloss over certain details and a software patent application and get it through. We’re having to provide much greater depth and detail into how it’s being done. And I think that’s a big change in the last few years. We’re seeing that the patents that are getting granted in the software space do have a lot of detail. Whereas in the trade secret spectrum, if your software is going to be firmware and it’s not subject to reverse engineering, you might be able to leverage that and keep it as a trade secret. The other is obsolescence. We look at software in terms of how long do you think that algorithm is going to be in the marketplace and when is it going to be supplanted?

I think the dynamism we’re seeing in the industry is that things are not lasting 10, 15, 20 years. We’re seeing entire industries disappear in 5, 10, 15 years. I think we are spending a little more time thinking about that trade secret balance because patents are expensive and you’re disclosing to the world what you’re doing. Whereas in the trade secret spectrum, you might be able to keep it a secret for a few years, as that may be all you’re going to get out of it before you switch over, and the algorithm now changes to something else. There was a much more active discussion of trade secrets and sometimes we go round in circles between the business leaders and the engineers and myself, trying to figure out the best decision for each individual invention.

Ray: In terms of, so this is fascinating, this software space we are watching closely from an analytic standpoint, as you can appreciate, Scott. We’re seeing volumes uptake in terms of the number of patents being filed around software or ML AI capability. Are you seeing similar things in the US marketplace where volumes and numbers are higher with patents around software?

Scott: Oh, absolutely. I think as you said, software ate the market, and it is one in which we’re seeing, especially being the shift in technologies. Even in the defense space, we’re seeing the same convergence of technologies in the commercial space that we’re seeing autonomy as an example, AI, 5g, a lot of this is purely software-driven and enormous numbers. I think the last data showed something like 70 to 80% of the patents granted in 2020 were software-related. The number of patents being filed on other hardware items is much, much smaller, and software has crept in. One of the things you mentioned earlier, which I think is an interesting point is, it’s not just the software, it’s the data, and data is protected sometimes differently.

In many cases, you sometimes can’t protect it. It’s very important that contractual agreements are protecting the data. Importantly, Bill Rue was the head of GE Digital when they first launched it, and his comment was he who owns the data, owns the world. And when he said that back in the 2013 timeframe, a lot of people just laughed, but it turns out that the data is remarkably important. The sensors that are collecting that data, if it’s an airplane or if it’s a car, who’s collecting the data, who owns the data, and what are they doing with that data? There are billions of lines of code in every car and multiple sensors gauging everything. Who’s collecting that data? What are they doing with the data?

Do they know how fast you’re traveling? Do they know where you went? They’re monitoring a lot of activities. I don’t think people understand. And that’s just cars, every appliance in your house, your phone, your computer, all that data that’s being collected and gathered about you fitting profiles and advertising is interesting to see where this is going to land in the future as more and more of this heads out and autonomy and AI get more involved with what’s going on in our day and day operations, whether it be a chocolate manufacturer or a defense company.

Ray: Firstly, we’re seeing the same thing Scott, this insane amount of convergence and something which we call the acceleration of the acceleration. All industries overlap. Let’s look at Hyperloop as one example, which is an amazing project, which Virgin is working on. The Boring Company, Elon Musk’s companies working on one, and I think there are 24 active Hyperloop projects right now in the world, which I can’t wait until it’s there because it will definitely change my life in terms of my commute from greater London into the city. And if you look at that technology, it’s only possible through acceleration across a whole variety of converging sectors. Material science, AI drilling technology, all of those kinds of different ingredients overlapping potentially together to create the Hyperloop, which is making things a lot more complicated than ever. But at the core of that is software. And as you touched upon the 2020 numbers, 70% of patents filed within the US market are purely based around the software. Do you think that will dramatically change your workflow then from an analysis standpoint, the types of training your team have to do from an IP standpoint, and then also the stakeholders around you? Does it change your workflow, the type of analysis you would require to effectively operate in a software-driven world?

Scott: I do think it makes it more complex. If you get an office action for a simple mechanical device, you can almost estimate it’s going to be two to five hours for you to complete it, because it’s usually fairly simple. We’re seeing these software office action rejections coming in at 35, 45, 50 pages long and they’re brutal. You talk about scalability, it’s one thing to have a few of those. When they become the more dominant attribute of your portfolio, your prosecution costs, and the time spent on prosecutions as an example, goes through the roof. These things are just media applications of high complexity and that’s just on one component of this whole trail of IP. You talk about the inventor’s time to draft and help out on a software application is immensely larger, who pays the overhead for the inventor that has to spend twice as much time on a software application.

As we continue to see the growth in software and the various developments around that, we are slowly seeing this creep into our evolving paradigm of how we are going to protect this in a meaningful way and yet not bankrupt the company by having vendors spend all their time working with patent attorneys. It is an area that I think most companies are trying to address in a piecemeal fashion. I think there may be some higher-level things we can all start looking at and doing things, better templates, and other things that might help out in that regard. But at the end of the day, the scalability of this is tough as we get more and more of these very difficult technologies that we have to patent and prosecute.

Ray: It’s fascinating you talk about this huge [inaudible 29:04 Deltrain], the complexity, and the number of office actions around a software patent because I think traditionally the meeting is around about $6,000 per typical patent. That’s the numbers that we see online. Typically, the average cost is $56,000 for a US pattern. And if in a pie chart format roundabout $6,000 is the back and forth around office actions. Is that Delta considerably bigger for the software side? If so, does the cost structure dramatically change from the average cost being around about $56,000 to a software patent, but I don’t have the number maybe you do, but is it a big Delta in terms of actual individual costs per patent?

Scott: Yes, it is a big Delta. I can tell you that your numbers are a little bit slight on software cases. I’d say you’d probably double those, and that would be my guesstimate. You’re talking about larger companies with high volume where the patent firms are giving them deep discounts. If you’re a smaller software enterprise, you’re talking software patent applications, probably starting around 10K, going to 20. If you’re a smaller, medium-sized company, that’s probably closer to the norm. I follow a lot of cases and I work hard to beat down my outside counsel to get the lowest price I can. But at the end of the day, they have to stay in business. And if they’re spending, you know, 50, 60 hours on a case, $6,500 is not going to cut it. I think we are seeing that increase. We have our outside counsel on fixed fees, but we provide them the ability to send engagement letters for each case.

We give them a difficult case, they’re not going to quote it at 6,000. And we’re seeing that uptick quite across the board. Once again, I have to predict what my budget is at the beginning of the year, and just hope and pray that I get it right by the end of the year. I think we’ve seen a marked increase in the last few years of our budget in general due to annuities and other things. I keep asking for more money and I think that’s going to be a continuing trend.

Ray: You see more support as well from the C-level of them giving more balance sheet backing to the IP department, and this is front of house now, it isn’t a back-office function, which is kind of like, oh yeah, we’ve got to have it, but it shouldn’t be as proactive as it could be. Are you seeing a culture shift in terms of support from the board and C-level level on investing in the IP department from a budget and human capital and culture standpoint?

Scott: Fortunately I think we do. And I think the message is out there. I mean, I think we used to be deemed as a necessary evil to some extent. I think that’s shifted. I think now they’re seeing the value proposition and every company is touting their IP portfolio. You can’t flip on the news without hearing about either patent litigation, IP issues, copyright issues, and the numbers are staggering. I mean, the Oracle, the Google case, or the copyright case that recently got handed down. That was a $10 billion lawsuit and fortunately, the Supreme Court ruled that the APIs were not something they could protect, but for the most part, these numbers are immense and that’s just damages let alone what it does to your business operations to have to stop and regear and retool. So yes, the IP is a very powerful tool if used properly. And I think the companies recognize that based on mostly what they read from other companies suffering the harm that can come about from that.

Ray: [inaudible 32:44] from what you’re observing specifically in the defense sector. Has that enabled certain types of programs, Scott, that you lead within your organization to raise awareness around IP and get different departments involved? Have you guys run any specific initiatives at BAE or just initiatives you’ve observed in your vertical or industry, which is really moving the needle around, taking IP to the boardroom, and getting different teams involved around IP?

Scott: I think a lot of times you have to look, each program is very different. Whether it’s a business area and whether we’re up to GE or here, you’re running a particular program and that particular program has certain attributes and parameters around it that you have to look at and everyone wants an IP strategy. That’s the big buzzword now. I want innovation, an IP strategy. It boils down to, what is your business plan? What do you want to do? What is the end goal? What is the short-term goal at the end of the goal? What are your competitors? What do they look like? What are they doing? How are you in this space? Are you a leader? Are you a trailer? It really is a lot more involved.

Everyone thinks an IP strategy is an easy thing to formulate, but it is very complex. With certain program areas, we’re starting to use analytic tools like PatSnap and other things to kind of gauge where we are. Nothing drives innovation more than showing that you’re lagging your competitors. A lot of times I will deliberately pull up a few of the patents from our competitors and wave them in their face saying, okay, well, you guys didn’t file many patents, but look who did?. And that tends to accelerate them to think more clearly about what is it that they’re doing and what innovation and improvements have they done regularly because having inventors to stop inventing and to sit there and do the paperwork, they don’t like that part of the job.

Most of them prefer to be in the lab tinkering. You have to sometimes capture them and get their attention span for a little bit of time and explain why it’s important that they stop and document their renovations. And that’s always a challenge at every company. I think some companies are much better at it. We continually struggle with that a little bit here at BAE Systems, because it is one where their focus is developing the best technology for the DOD, and everything else is an afterthought. And so, we have to do with deliberate sessions sometimes. We put IP capture, but they’re called ideation sessions, innovation sessions, whatever you want to call it. It’s a time where you put pens down, you sit in a room with people and you say, okay, what have you been working on? What have you developed? And you start delineating some of the improvements they’ve made and try to explain to them that, okay, no one’s ever done that before. They want to think we want to capture that. I think that’s one of the things we’ve been doing here is having deliberate capture sessions on certain technology programs, that help the team and facilitate the process of capturing those inventions and documenting those, and proceeding with the ones that go through the process to patenting.

Ray: Switching lanes and just looking at the aerospace and defense marketplace. And that’s an industry that excites us here at PatSnap. We have many listeners who are just fascinated about some of the technological developments within aerospace and defense because a lot of it bleeds into the consumer markets and what it does, boy, does it make an impact because it’s typically very deep tech. Are there seismic changes happening within your industry? And if so, be it from a data or software standpoint or now opening up new markets and being less focused on the DOD and looking at more consumer applications? What are some of the big megatrends and seismic shifts happening within your industry at a macro level, and how does IP fit into that? Because we’re seeing, especially, I mean, COVID accelerated it, but we’re seeing off the charts change Scott, across all markets. Some literally make me fall out of my chair, what they’re doing now and what they’re trying to focus on. I was just curious, what are some of the big headlines within your marketplace?

Scott: I think the big one that I’m seeing as a trend and it’s probably a good thing is the collaboration. There used to be a theory that if it’s not invented here, we’re not interested. I think what we’re seeing now is most companies are recognizing that you can invent everything you need in your own space. You need to be getting the best technology, the best people. And you’re not going to be able to hire those people. I think that we’re seeing a rapid increase in the number of players and the collaboration efforts going on. A lot of big companies are frenemies. They’re joining forces to go for the common good. You mentioned the Boring going on. Yes, you need to have people that are not software people. You need to have mineral speed people. You need to have people that are material scientists. You need to have all that skillset.

A lot of it is turning into assembling the correct parties and partners, and the partners are very important and you will either succeed or fail based on your selection of partners. I think that’s a big effort going on across the board, even in the DOD space where there’s a big pressure that, obviously the government spends a lot of money on DOD, but it pales in comparison to the amount of money that private enterprise is spending on R&D. Is the DOD producing the “best leading-edge technology” in certain areas, probably not? It’s being done in the commercial space and what the government is trying to do on our side is, take that leading-edge technology, bring it into the defense spectrum, which it needs to be hardened, needs to be and satisfy all the criteria to be a military product or a military service.

The general commercial [inaudible 38:23] product must pass muster. It needs to be hardened. We’re seeing a trend of some bleeding-edge or leading-edge technology, not coming from defense contractors, but coming from third parties. And I think it’s a welcome change. We’re starting to see new players step into space. If you look at NVG, which is night vision goggles, HoloLens from Microsoft is the key player there because they have some great technology that the military loved. They assembled a team with Microsoft and other players to take the commercial product and make it more military. Look at those big things about drones, while back the military was trying to see how they could formulate and patternize and make a coordinated effort amongst swarms of drones.

And then we saw, of course, the Olympics and other things where you have thousands of drones in the air and the forming signals and spaces. One recent one was in Japan. They formed a QR code and people could take a picture of it and download something. That technology is there. It’s just a matter of finding it and leveraging it to the place where we needed it, at least in the military. I’ve looked at collaboration efforts as one of the big changing things that we’re seeing, and there’s a big push by the government in that regard because of all the funding that’s being done on the private side. And frankly, nobody can afford that level of funding on the military side, defense contractor side. We have to leverage where the money is being spent, find the best partners and move forward with the best technologies.

Ray: It’s interesting you mentioned that. You are seeing a couple of classic Silicon valley style startups who are catering to the defense market. There’s one name that slips my mind, but I know that they’re doing some really big headway and getting some really interesting contracts. We are observing, the name slips my mind.

Scott: It’s probably Palantir.

Ray: That’s more on the data side, but I think there’s also a hardware player. I think there’s a venture capitalist called Lux Capital and they’ve moved money into that startup. The name completely slipped my mind, but I’ll send it to you. And they’re directly selling to the DOD, which is rare in startup land. We are also observing that. It’s interesting how you mentioned the not invented here mentality. I mean, that’s one of our missions here at PatSnap to overcome that psychology. It’s really difficult. Scott. It’s like it’s been like a 10-year effort for us, but it excites me to hear that we are now seeing some changes, especially in industries like aerospace and defense. Have you got some good examples that you can share where there are certain use cases or stories which led to purely external innovation and how that played out? Have you got any favorite examples within your organization or other companies, which complied?

Scott: Some of this is proprietary. I’m trying to think about my memory banks here on ones that are more easily shared. We have done and what we recently did and this was something out of the operation space where we collaborated with another party. We were finding that a lot of our components that were coming in waffle packs, we call them components out of pocket. Basically, these semiconductor dies as you can tell from the semiconductor industry right now, every die is really important because of this supply to political issues we’re having. What we’re finding in the waffle packs was the parts bouncing around that were causing failures or potential failures of parts that need to be maintained specifically in their pocket during the entire transit and handling process.

We identified a problem and our folks were working on a solution to that, and they came up with a better clip and lid mechanism by which the whole departs firmly in place and make sure that the uniform pressure, et cetera. But we don’t manufacture these parts. We reached out and we found a company that manufactures clips and lids, and we worked with them on designing and developing a market and a product that they are going to sell and manufacture, we’re going to purchase it. But it was a nice collaboration in that we saw where we needed a fix, but we didn’t have the capabilities to do that in-house. We were not going to turn into a manufacturer of these things. We had to partner with someone that was and that was the story we recently released. It’s called a super lid, super clip, and lid and Delfont is the company that we’re working with on that. That’s public so I can share that.

Ray: What’s been the force multiplier to drive that change, Scott, because I know for so many years that not invented here, the mentality that mindset was really strong and difficult to get around. What are some of the kinds of macros which have driven people to execute and change their habits in your professional opinion?

Scott: I think there’s a combination of things. Number one, there’s a recognition that we have limited resources. Basically, you want to change the world, but how do you start doing that? A lot of places are looking at automation right now across the board, every company is trying to figure out how to better and get greater efficiencies, make things better yield, better efficiencies, et cetera. We can talk about the automation of a factory floor that’s been doing the same thing the same way for as many years. You’re going to have a lot of resistance to that. You need to say, okay, what can I get done? What are the battles I can win? We have a lot of people that are younger folks, especially looking at things in a new light.

I always liked getting some diversity of opinions. And so getting younger folks into the manufacturing lines, they look at things very differently, especially because they haven’t been brought up doing the same thing the same way at the same time. They are bringing new ideas and thinking into the process. And I think there’s a recognition that if it’s going to save money and make a better product it doesn’t matter how it gets there, but somehow you have to figure out how to get to the end game. I think a lot of folks are revisiting the mentality of, we have to design and develop everything here. I think there’s just been a general trend towards reaching out and finding better partners because we just don’t have the funding and the resources to do it any other way. If we want something done, you need to find the right party to work with and help both collaboratively bring the production or whatever it is you’re doing to a final state in a fairly quick time frame and the only way to do that is by working with third parties.

Ray: Thank you for sharing that example, Scott. Switching lanes completely and coming full circle. Earlier we were talking about obviously now kind of the big headlines S&P 500, 90% of it is intangible assets in terms of market cap. But if you look at liquidity in the markets and the number of patterns that are transacted and traded, it’s around about $180 billion a year. It’s tiny, it’s a fraction of a trillion-dollar market. I’m not sure if you’ve seen an IP watchdog or some of the news portals that you follow, but there’s been a really interesting organization called IPwe. They’ve partnered with IBM to build out an NFT platform. I’m sure you’ve seen this a whole bunch of times during your decades within this space, the holy grail of an IP marketplace, with Amazon and eBay where you can seamlessly transact, reduce costs, friction, and enable price discovery and transparency, which is a holy grail, which potentially might be possible one day. Is that something you’re looking out for in this kind of potential boom? Its potential at the moment, a lot of headlines of the patent system, fundamentally being disrupted at first principles level where it’s tokenized and it’s a lot more liquid and transparent. What are your thoughts on that blue-sky development? And is it something that you’re observing from a distance?

Scott: Observing from a distance? You know, I have my thoughts on it, as you said, you know, when you, when you’ve been around, as long as I have, and I’ve earned these gray hairs you’ve seen a lot of things come and go over time, and this is the latest, shiny thing is the NFTs and trying to commoditize the patent world. Once again, it’s a tough one. I’m old, I’ll admit it. I look at some of this with a lot of speculation in terms of, okay, how’s that working as a little split as a little bit of skepticism as to whether they’re going to make it work. The implementation of it will make people jump on board with it. You see these strange stories of someone who’s selling a YouTube video for $750,000 to someone as an NFT.

I don’t know who’s buying it. I think it’s crazy but once again I think it is one it’s worth watching from a distance. I just want to see how it plays out a little bit more because it is one that if you look at the copyright space and its copyrightable works as well. There’s another area. I think that is probably more right than the patent space. There’s a lot of legislation in the US to come up with small claims courts of sorts in the copyright world and try to resolve all those issues because it’s a little more, I think it’s probably an easier one to tackle in the copyright realm than it would be on the patent side because valuations are substantially different. I think it’s going to be interesting to see how that plays out as well because that’s looking also at trying to figure out a better marketplace for people to buy and sell copyrightable works as opposed to the intangible assets associated with a patent. So, yes. I’ve been reading about it. I’ve been keeping tabs on it. But I haven’t yet put my t-shirt with the name on it.

Ray: You think it will happen Scott, this time around? I think IPXI from Ocean Tomo have come and gone and then there’s one or two, a couple of years ago. I’ve always watched them from a distance as well and just see how they unfold. But do you think kind of post-pandemic and now this acceleration environment we’re in, we are going to see B2B marketplaces play out like they’ve played out in the consumer world? Do you think the timing’s there?

Scott: I view this in some respects, as you remember the domain name space, I had a domain name, squatters and all that, and I’m not sure if it still goes on to some extent, but if somebody bought business.com for like a million dollars and everyone laughed at them until they sold it for a lot more than that, it is one of those marketplaces where it can come up. But that marketplace has watered down a bit. It hasn’t gone back up to where it was, probably because they opened up so many more domain names. The problem I see with the patent area, in particular, becoming more of a commodity is that valuations are exceedingly difficult. When you start saying, how much is that patent worth? Well, worth to whom? Obviously, from the seller’s perspective, it’s worth a billion dollars.

I had a vendor tell me one time his patent’s worth a billion dollars, and I felt bad. I laughed at him and I felt bad about it later, but it depends upon who the parties are now, and it’s different from a house where you have a market and you have a lot more sales and transactions occurring. Here, you’re stepping into a marketplace that does not have that visibility on sales. And it’s much harder to gauge the valuation of a patent. You can hire professionals to come up with all sorts of valuations. Depending on who you hire, they’ll come up with different numbers. I think it is going to be difficult on the evaluation side because it does vary.  It’s amazing, some people say, oh, the market is 50,000 per patent for that technology space.

Okay. Where did you come up with that and you find out that it’s just an average of various things, but a particular patent with particular claims set and prosecution history and all the things that go with it depending on where it hits, you know, it is going to be interesting? I think some of the tools coming about whether from companies like yourself or other companies are starting to gain data and they may be able to do a better job of providing a more accurate valuation. It’s just very difficult right now.

Ray: Interestingly, you mentioned, I think we are quite a leap approaching a healthy first and we’re seeing so many financial institutions specifically in Asia who are now loading capital against the IP assets of the business and building out quite mature frameworks around valuation and building out quite sizable products actually within that marketplace. It’s getting there, but patent valuation is another one where I’ve seen sparks fly, people get annoyed around the table when they discuss that or get passionate. It’s an ongoing journey I still think we’re very much on.

Scott: As you mentioned, data is an important part of that. The more data you have, the better fidelity on your valuation, we just need more data.

Ray: And that’s where I think where we’ve been well serendipitously in the middle of that. We can help participate in the community to build that out. Well, Scott, looking at the final part of our conversation, as the C-level exec within the IP world, where do you see the IP department in the next three, four years in terms of new paradigms, new activities, what are some of the big things you think potentially will change in the future in terms of the operating rhythm, the execution rhythm of an IP department at a larger organization. Do you see much change in the next three, four years? Any new exciting developments?

Scott: I don’t know if I see anything new and exciting. I think we’ve already gone through the stages of new and exciting things with the last round of US changes in the law. And some of the caseloads came out. I’m hoping things stay a little more solid in some respects. It’s been very fluid the last few years. I do see that the valuations are there in terms of trying to prove the component of IPs and support for the particular business. I think from my side, I don’t see that many dramatic changes, to be honest with you, I’m hoping at least I don’t see too many dramatic changes. I think I’m trying to just run it on a steady course right now where we are. Quality is a big issue. I think, across the board, it is one where I think most folks are struggling because once again, as I mentioned, your budgets are fixed in some ways and you have the pricing or the complexity of the patents has gone up.

What is that old saying? You can have quality cost and time, which two do you want out of the three? I think that’s what we’re seeing in some respects is that it is a challenge to get all those components together regularly and systematic approach. I’m looking to probably add some rigor around the tools and processes that I have to make sure I have the quality, the price, and the speed that I need to go through and handle the preparation side of things. Similar to prosecution, I’ll be looking to make sure I continue to refine the skill sets and processes around it so that we’re getting the best output we can for our limited budget.

Ray: Well, Scott, it has been awesome connecting with you today, and the final part of our conversation is a bit of fun, a quick fly round. What are the top two books that you would highly recommend or gift?

Scott: I’ll be honest with you. I read all day long to be honest. I haven’t read a book for pleasure in quite a long time, and really on the top of my head I can’t think of one because I spend my day reading patents, which, granted they’re books in some respects, but I can’t tell you about them because they haven’t been published yet.

Ray: Okay. Alien life form, believer or non-believer and why?

Scott: I’d say yes. I believe that there’s something out there. I don’t think it looks like me. But yes, I think there’s something out there. It’s just statistically, there are just too many things out there.

Ray: Thanks Scott, it’s been awesome having you on Innovation Capital. The exchange has been super fun and you take care.

Scott: You too Ray.