A multinational corporate client, who was concerned about potentially defending non-practicing entity (NPE) patent suits, recently asked me about its options for joining a U.S.-based defensive patent pool. Upon doing the research, I was surprised to learn that there are only really three options: Allied Security Trust, RPX Corporation, and Intellectual Ventures!
First, some background.
NPEs, as most of us know, are entities that own one or more patent portfolios, attempt to license them through targeted letter-writing campaigns and then file patent infringement suits against those letter recipients who refuse to enter into non-exclusive licenses. In some cases, due the U.S. Court of Appeals for the Federal Circuit’s 2007 ruling in Sandisk Corporation v. STMicroelectronics Inc., NPEs often file law suits first and then attempt to negotiate a license with the accused infringer/defendant.
Some NPEs have purchased the patents they are asserting and, in other cases, the NPE entity is actually founded by the inventor(s) of the asserted patent portfolio. In the past decade, the NPE industry has matured from solo inventors teamed with their contingency lawyers to more sophisticated companies with hedge fund and institutional investor backers.
PatentFreedom LLC – an online research initiative dedicated to studying NPEs – has reportedly identified and profiled over 640 distinct NPEs as of July 2012. In 2011, for example, there were 4,015 patent actions initiated in the U.S. – the highest of all time – with approximately 40% of those patent suits initiated by NPEs. PriceWaterhouseCoopers’ 2012 Patent Litigation Study, analyzing data from 2006 to 2011, summarizes that the median damage awarded to NPEs was $6.9M, while just $3.9M for operating companies. Overall, patent owners have an approximate two-third success rate at trial.
In response to the “NPE problem,” defensive patent pools have formed. These entities often focus on certain technology areas or segments, and are inspired by a “let’s take these patents off the street before NPEs get them” attitude. Thus, these pools result in multiple operating companies – who may have not previously cooperated, done business or even respected each other – joining financial and other resources to create an independent entity to acquire potentially “problematic” patents, and license them to anyone willing to share the financial cost of acquiring the patents and the management overhead of administering the pool.
Unlike NPEs, defensive patent pools entities do not (at least initially) seek to generate revenues. Rather, they charge admission fees into the pool to fund IP acquisitions and the administrative costs to operate the pool. In sum, defensive patent pool aggregation is analogous to an insurance policy. But, where classic insurance lowers a company’s costs when accidents happen, patent pools are designed to reduce the likelihood of accidents (i.e.,being sued for patent infringement) from happening at all.
Thus, I now turn to the three defensive patent pool options. In identifying these three options, I eliminated “single purpose” or standardization patent pools – such as the Open Innovation Network which promotes Linux by defensively collecting any patents implicated by the open source operating system – from consideration. I also ignored the so-called, “single-purpose consortiums” formed by operating companies to purchase a specific set of patents (e.g., the2011 purchase of 6,000 Nortel telecommunications-related patents by a consortium of companies which included Apple, Microsoft, RIM, Ericsson and EMC for $4.5B).
The following excerpt from an October 2012 Harvard Business School working paperadeptly describes the business models of RPX, Allied Security Trust and Intellectual Ventures, whose initiation and annual membership fees range from five to seven figures:
RPX charges its clients an annual subscription fee, in exchange for which it identifies patents that might be threatening to subscribers, acquires them (or the right to grant sublicenses) in the open market from individual or corporate inventors or NPEs and provides all of its subscribers with licenses to those patents. The patents owned by RPX are also made available for use in counter-lawsuits against non-members who initiate litigation against members. Importantly, RPX itself has explicitly committed never to assert or litigate patents in its portfolio.
Allied Security Trust (AST) offers a variation of the RPX model with several key differences. First, while RPX is a for-profit firm, AST is a non-profit entity governed by its members, which overlap with RPX’s clients. Second, RPX decides unilaterally which patents to buy and uses its own capital to do so, while AST identifies patents or portfolios of patents and then solicits acquisition bids from its subscribers. If the sum of the bids for a particular set of patents is sufficient to close the transaction, then only the bidding members for that particular acquisition receive a license to the relevant IP. (In the case of RPX, all members receive a license to all patents acquired by RPX). AST’s licenses are perpetual from the outset, unlike RPX, which introduces vesting periods in its licenses. Members who do not bid in the initial acquisition can still subsequently purchase a license to the patents involved, at a price equal to the highest bid. Third and finally, after acquiring a set of patents and licensing its bidding members, AST looks to sell them. It starts by offering each of the original bidders, starting with the highest one, the opportunity to buy out the entire portfolio by reimbursing the other bidders and AST’s related expenses. If none of the bidders is interested, AST places the portfolio for sale with a broker.
Intellectual Ventures (IV) is technically a hybrid between a NPE and a defensive patent aggregator. Because of its size, prominence and unique status among IP intermediaries it deserves separate consideration.
IV is a[n] NPE (according to some critics, “the world’s largest patent troll”) because it acquires, creates and seeks to license patents without directly making any products or services itself. … During its first 10 years, IV also differed from a typical patent troll in that it had not brought a single lawsuit, attempting instead to monetize its patent portfolios through “friendly” licensing deals. This changed in December 2010, when IV started filing patent infringement lawsuits against a variety of operating companies in semiconductors, software and electronics.
The fundamental feature that sets IV apart from other NPEs is that many of its investors are strategic and include prominent technology companies such as Amazon, American Express, Apple, Cisco, eBay, Google, Intel, Microsoft (which was the lead investor), Nokia, SAP, Sony, Samsung, and Verizon. Thus, IV also functions as a defensive patent aggregator, at least for its strategic investors. Indeed, the latter automatically receive licenses for subsets of the patents acquired by IV (earlier investors receive wider coverage), which serves to shield them against lawsuits from trolls or competitors.
Happy defensive patent pool joining!