NAIP Patent Blog

By Jeffrey Chang

(Updated with new details from RPX 11/27/2008)

The past few years has seen the introduction of several controversial participants to the global patent ecosystem. The most well known, Intellectual Ventures (IV), has already grown to become a several billion-dollar operation, and just recently has announced an expansion into Asia. 2008 has also seen organizations like Allied Security Trust (AST) and RPX emerge, with both boasting substantial capital funding.

Who exactly are these participants? They call themselves patent trusts, patent acquisition services companies and patent investment funds. Others have called them patent trolls, anti-patent trolls, patent buying cooperatives, and so on. But regardless of who they are and what they are called, they are undoubtedly a growing power in the global IP industry—major players who will shape the future of IP.


"Non-Traditional Participants"

In contrast to "traditional" participants (such as inventors, engineers, agents and lawyers), IV, AST and RPX are more similar to non-practicing entities (NPE), patent pools and other “non-traditional” participants. Yet because these organizations are relatively new, they do not settle cleanly into these existing classifications.

Intellectual Ventures

Founded in 2002 by former Microsoft CTO Nathan Myrvhold, Intellectual Ventures claims to be an "Invention Company" whose purpose is "highlighting the business of invention and providing a means for inventors to be fairly compensated for their work." IV does not manufacture or produce any products (the patent or patent portfolio is the product), and develops patents internally or acquires them through (often clandestine) deals. The IV website states that eventually they will market and assert their patents on a "broad and non-exclusive basis."

Details are scarce as to where IV acquires funding for these activities, but major contributors include Microsoft, Intel, Sony, Google and so on. These mega-corporations signed on initially due to IV's unique proposition: IV would apply for and acquire patents as a preventative measure against patent trolls. The corporations would additionally be required to license any patents they used, but they would also share in the profits this "patent hedge fund" would produce.

Allied Security Trust

In 2008, a group consisting of Verizon, Cisco, Google, Telefon AB L.M., Ericssson, HP and five other major high tech heavyweights founded the Allied Security Trust. AST's stated purpose is to address "the increasing need for innovative companies to defend against costly patent law suits." Like Intellectual Ventures, AST does not produce or manufacture. But unlike IV, AST only purchases patents, and does so in order to grant the member companies non-exclusive licenses. AST has stated it will not assert patents against other companies and all patents are resold into the market after a period of time.

Corporations become a part of AST by paying US$500,000 membership fee and contributing US$5 million into a fund to purchase patents. Profits are not a goal. In fact, AST is attempting to inoculate its member companies from potential infringement suits.

Rational Patent Exchange

RPX made a big splash in September of 2008 by announcing it had acquired funding from top investment firms Charles River Ventures and Kleiner Perkins Caufield & Buyer. Few had known about RPX prior to the announcement, and many were surprised to hear a number of details, including: 1) the founders are ex-Intellectual Ventures bigwigs John Amster and Geoffrey Barker; 2) they plan to purchase US$100 million in patents & patent applications; 3) they already have US$30 million.

RPX, a "patent acquisition services" company, has not elucidated its business model, but according to statements from Amster and the company's own communication materials, RPX will acquire patents to prevent NPEs from asserting them against operating companies. RPX will not develop these patents, but neither will it assert them against other companies. Instead RPX will generate revenues from licensing and selling the patents, which will be critical to their continued operation because RPX "does not expect to seek other direct equity investments either from venture capitalists or high tech companies."

(Update 11/27/2008)
RPX describes its business as "Defensive Patent Aggregation" club. RPX will act independently to purchase patents that would presumably otherwise be purchased and asserted by NPE / Patent trolls. Then companies pay an "annual fee to have a license to all patents and associated rights in the aggregation." This fee is between $35,000 and US$4.9 million a year, dependent on the company's operating income. Over time, a member would eventually gain rights to patents in perpetuity, whether they continue to pay membership or not (they may also purchase the rights for a one time fee).

Founder John Amster as stated that RPX "needs at least 20 members to remain cash-flow positive." Currently, mega-corporations IBM and Cisco have signed up, significantly raising the RPX's credibility. RPX will focus on IT, software, e-commerce, mobile communications, networking, and consumer electronics device patents.

Compared Against Existing Non-Traditional Participants

Intellectual Ventures (IV) is most like... Non-Practicing Entities except... A patent owner who does not manufacture or use the patented invention, but rather than abandoning the right to exclude, an NPE seeks to enforce its right through the negotiation of licenses and litigation. ．Holds tens of thousands of patents ．Manages patents into "funds" for investors ．Licensees can also buy into these patent funds ．Has not yet engaged in litigation

RPX is most like... Patent Holding Companies except...* Companies set up to administer, consolidate and license patents or otherwise enforce patent rights, such as through litigation ．Will offer services on behalf of, but not be a part, of any specified company ．Major investors are a group of venture capitalists, not patentees ．"An affordable service model that reduces the threat of assertion and litigation and provides efficient patent protection to subscribing companies." *See updates

Allied Security Trust (AST) is most like... Patent Pools except... Consortiums of at least two companies agreeing to cross-license patents relating to a particular technology. ．Acquiring mutually-beneficial patents, not cross-licensing, is the main goal ．Non-exclusive licensing rights of patents purchased are granted to members ．Patents are re-sold into the market ．Does not engage in litigation

Controversy

What really sets each of these entities apart from previous "non-traditional participants", however, is the purpose and intent of their existence. Each has, at one point or another, (including IV) been hailed or proclaimed itself as the Anti-Patent Troll. One of the principle philosophies behind companies like IV and AST was that buying (or innovating) critical patents would be taking a potential weapon-of-mass-litigation out of the market equation. This position helped these organizations raise hundreds of millions of dollars from corporations.

But for all the rhetoric, many remain suspicious. Indeed, patents are not being removed from any equation; they are just changing hands from unknown variable to known variable. Intellectual Ventures, which was initially called the "Patent Defense Fund", eventually dropped the moniker and business model in favor of "Intellectual Ventures" and a private equity model. Today IV holds over US$5billion worth of patents and extracts hundreds of millions in licensing fees a year. Recent news reports have suggested the licensees are not very happy ¹ and Internet blogs and forums constantly post fears of licensing Armageddon.

When AST emerged publicly in 2008, and seemingly in response to IV, they sought to allay similar fears through its self-described "Catch & Release" model. After purchasing a patent and granting its members non-exclusive licenses to it, the patents are resold into the market. AST members, in effect, would be inoculated to any potential infringement cases.

However, in this arena, AST competes directly with IV, who has moved more quickly, independently, and often secretly, in purchasing patents. In contrast, industry insiders say AST does not yet have the procedures to act as quickly or efficiently. IAM magazine reports that "purchases have to be given the green light by members before they can happen – something that could potentially mean long delays and lost opportunities." ²

What remains to be seen is the role RPX will serve. Having promised not to assert patents it acquires, and also not rely on VC or corporate funding, the question is how RPX will operate. RPX claims details will come in October 2008, although as of this article's publishing, none have been released.

(Update 11/27/2008)
With respect to some of the shortcomings of both IV and AST, RPX does attempt to address the litigation issue by promising not to assert patents. Also, because RPX will act independently in purchasing patents, they would likely be able to react more quickly to certain "hot" patents than AST. However, RPX's subscription model does raise questions, such as the free-rider problem, which Amster discusses here.


Conclusion

The emergence of Intellectual Ventures, Allied Security Trust, and Rational Patent Exchange is just the beginning of a new era in IP. Today the market views IP ever more as an asset that can be traded and as a weapon that can be astonishingly effective. As a result, traditional participants in the industry have had to make adjustments, sometimes difficult ones, to adapt to the rise of NPEs, patent holding companies and patent pools and now, new organizations like IV, AST and RPX.

The next logical questions then, concern the effect these organizations will have on the industry. How will large corporations, who have financed these entities, react to ever increasing licensing payments? What of small inventors and businesses? Are these entities a form of anti-competitive measures by big business, as theorized by one blogger?³ Or will they provide inventors with better, fairer compensation? Will this ultimately provide consumers with more choices and lower prices because corporations have better access to technologies and fewer litigation suits? Or will it mean fewer choices and higher prices because corporations will be paying licensing fees that they may have traditionally ignored in the past. And finally, for our readers, what will be the affect in Asia, especially now since IV has expanded into the region.

Whatever the answers, all players and participants in the IP industry would be wise to keep an eye on the shift that is occurring—one that is already changing the way we look at innovation and intellectual property, and already changing the foundations of the IP industry.


Relevant Links:

Intellectual Ventures - http://www.intellectualventures.com/

Allied Security Trust - http://www.alliedsecuritytrust.com/

RPX - http://www.rpxcorp.com/

A comprehensive listing of many IPR Holders - http://naipblog.blogspot.com/2008/10/index-of-ipr-holders-part-i.html

Transcript: Myhrvold of Intellectual Ventures - http://online.wsj.com/article/SB122142717791833671.html

Intellectual Ventures turns its attention to India - http://www.iam-magazine.com/blog/Detail.aspx?g=ddfbe681-4599-4ea3-b329-a7b63e1fdd44

New report lifts the lid on Intellectual Ventures - or at least opens it a long way - http://www.iam-magazine.com/blog/Detail.aspx?g=b16aa35f-d559-4ba5-a928-6dfc7b2981ce

References:

1. http://online.wsj.com/article/SB122161127802345821.html

2. http://www.iam-magazine.com/blog/Detail.aspx?g=19318b74-e29f-44d3-a020-1da3492a38b1

3. http://blogs.law.harvard.edu/jim/2008/07/05/copyfight-google-hp-and-others-form-league-of-extraordinary-patent-holders/

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