TikTok Forced Sale Bid Embroils ByteDance’s Vast Patent Trove

ByteDance Ltd.'s sizable intellectual property portfolio would make a forced divestiture of TikTok especially messy, lawyers say, as it would play a significant role in shaping the potential blockbuster deal.

The Chinese company has gained more than 900 US patents since 2020, according to an analysis by Bloomberg Law. They cover technology including an artificial intelligence tool that creates music and ways to recommend videos to users. Buyers usually want to obtain IP rights in this kind of transaction, lawyers said, but ByteDance might not be willing to part with its valuable technology.

Parsing out ByteDance’s thousands of patents worldwide would be one part of a massive deal that would require “thousands upon thousands of lawyers, investment bankers, lobbyists, all trying to get this done,” said Jonathan Lazarow of corporate and IP boutique Ambrose, Mills & Lazarow.

Patents provide cash flow and business protection, he said. “If you’re a buyer on the market, you know, you need to use those patents to help justify your” financing, he added.

The US House passed a bill March 13 that would ban TikTok from operating in the US unless ByteDance sells off the short-video app. The legislation is pending in the Senate, and President Joe Biden said he’ll sign it if it makes it to his desk. The ban would go into effect 180 days after the bill is enacted. The US Justice Department this week has plans to brief Senators and push for action on the measure, Bloomberg News reported.

TikTok plans to exhaust all legal challenges before considering a divestiture if the bill is passed, Bloomberg News reported last week.

ByteDance’s Portfolio

ByteDance has more that 900 issued US patents and more than 600 pending applications, according to Bloomberg Law. TikTok is listed as an assignee on several dozen US patents, which means it has an ownership interest in them. It could also be using others in its parent company’s portfolio.

The inventions assigned to TikTok range from methods for live streaming to voice-controlled content creation and a 3D eyelash filter. Some of ByteDance’s US patents overlap with equivalent ones it’s been issued in China, where the company holds more than 2,000 patents, according to a Bloomberg Law analysis.

It’d be a “massive undertaking” to sort through ByteDance’s global portfolio if a sale were to happen, said Brown Rudnick LLP Partner Ian DiBernardo. The parties would have to figure out which bucket each patent falls into, he said—whether it’s being used exclusively by TikTok, across multiple ByteDance businesses, or primarily by other businesses but still with some relevance to TikTok.

In most spin offs, both the parent company and subsidiary want the other to be successful, said Dickinson Wright PLLC Partner Jomy Methipara. But the divestiture could become more difficult if there are internal battles over which business should get what IP, he said.

Neither ByteDance nor TikTok immediately responded to Bloomberg Law’s requests for comment.

Tight Timeline

The House-passed bill’s six-month deadline is an even quicker turnaround than when the US forced the Chinese owner of popular gay-dating app Grindr to sell in 2020. Beijing Kunlun Tech Co. said in May 2019 that it’d reached an agreement with the Committee on Foreign Investment in the US to sell Grindr before the end of June 2020. The company sold the app in March 2020 for $608.5 million.

“They probably left some money on the table because they had to transact at a much quicker, much swifter sense of speed,” Lazarow said.

The dating app had just four issued US patents at the time of sale, according to Bloomberg Law data.

Some senators, including Richard Blumenthal (D-Conn.), have said six months may not be enough time for TikTok to line up a buyer, but the timetable could change through an amendment process. Other lawmakers have said ByteDance investors could benefit from selling TikTok because it’d remove uncertainty for the company due to the tense relationship between the US and China.

Lazarow agreed that investors could push for a sale if they view the alternative as losing access to the US market.

“Will the owners, ByteDance, and the private equity funds and venture capitalists who funded ByteDance say, ‘Look, we need you to sell this because the risk is you get nothing for the work. All of a sudden you’re just a Chinese company and that’s not what we signed up for,’” Lazarow said.

Unclear Parameters, Security Concerns

Though the bill calls for ByteDance to relinquish ownership of TikTok, it’s unclear whether a forced divestiture would require selling its US IP rights. The bill defines a qualified divestiture as a deal “the President determines, through an interagency process, would result in the relevant foreign adversary controlled application no longer being controlled by a foreign adversary.”

Divestitures can exclude IP assets or require them to be sold off, said Knobbe Martens Partner Stephen Larson.

A potential buyer would probably prefer ownership, Methipara said, but an exclusive license with enforcement and sublicensing rights could work as well. A global perpetual license could be “just as good as owning the patent,” Lazarow added.

Non-exclusive licensing rights are another possibility, Larson said. But in that case competitors could also obtain licenses to the technology, which he said makes that option “obviously the least valuable” for any spin-off.

Keeping the IP could be attractive to ByteDance from a revenue perspective, DiBernardo said.

“The aggregate value of selling TikTok and having the IP to separately monetize outside of TikTok—whether it’s a sale or to use in ByteDance’s other businesses—that aggregate, that combined value can be greater than just leaving it with TikTok,” he said.

Wedbush Managing Director Dan Ives has reportedly said TikTok could sell for $100 billion if the source code for the app’s algorithm is included, and for $40 billion if it’s not.

The Chinese government’s interest in being technology innovators could affect whether they’d sell their algorithms and technology to a non-Chinese buyer, DiBernardo said. That could make licensing unworkable if it’s impossible to do so without ByteDance giving up TikTok’s algorithms.

“The buyer is going to want the ability to control the algorithm, update it, or at least take it licensed with all the technology,” DiBernardo said.

Licensing, however, could fall short of the bill’s intent, Lazarow said.

“The whole intent of the legislation is that we don’t want a Chinese entity like ByteDance to have access to US consumer data or user data because it’s a national security risk,” he said. “Will the license itself, if its just a license and not a purchase of the patent portfolio itself, undermine that?”