Litigation risk for tech IPOs

Companies needed to identify the risks they faced and mitigate them through measures such as carefully selecting technology for export markets. Photo / Thinkstock

Patent and intellectual property rights overlooked in rush to list technology businesses.

New Zealand technology companies could be unwittingly heading into a "perfect storm" of intellectual property litigation risk as they rush to float on the sharemarket, an IP expert says.

New Zealand is in the midst of an initial public offering (IPO) frenzy, with the success of listed tech businesses such as online accounting software provider Xero encouraging many privately owned tech firms to go public.

Four of the 10 companies that listed on the NZX last year came from the technology sector, while two software developers, Gentrack and Serko, have already floated in 2014 and at least four more tech firms are expected to list before the end of the year.

Paul Adams, chief executive of Auckland-based advisory firm EverEdgeIP, said non-practising entities (NPEs) - which hold IP assets and earn revenue through litigation and licensing - had been dramatically increasing their activity and often launched patent infringement suits around the time of major capital transactions, such as an IPO.

In the lead-up to an IPO the company and its investment banking advisers would do just about anything to avoid threats to the listing process and were easily "shaken down" by NPEs, Adams said.

The post-listing phase was also targeted because companies were often cashed-up and keen to avoid publicity that could push their stock price down.

Adams said a major New Zealand company, which he declined to name, was sued six weeks before a "major capital transaction" and forced into a settlement. Further afield, micro-blogging service Twitter had to pay US$36 million to IT giant IBM shortly after its 2013 stock exchange listing in order to avoid patent litigation.

"It's not just the [patent] trolls that are doing it - it's also the operating companies."

He said the global IP market had fundamentally changed over the past five years and small and medium-sized companies had become the most common target for legal action.

The combination of market changes, a "relatively high degree of naivety amongst New Zealand tech companies" and IPO activity was creating a "perfect storm" for potential litigation.

Companies needed to identify the risks they faced and mitigate them through measures such as carefully selecting technology for export markets and making sure new products under development did not infringe on other firms' rights, Adams said.

Serko chief executive Darrin Grafton agreed that IP litigation risk was increasing.

Tech listings 2014
Listed
• Gentrack
• Serko
Confirmed to list
• IkeGPS
• Pushpay
• Eroad
• Vista Group
Tipped to list
• Orion Health
• Wherescape
• CricHQ
• TripleJump
• PowerbyProxi.