Can New Patent Monetization Models Save American Innovators?

The passage of the America Invents Act (AIA) in 2011 was touted as an important moment for modernizing patent laws and making it easier for innovators to innovate. Of course, nothing could have been further from the truth. The AIA further weakened patent rights, which is exactly what the large tech companies wanted. Far more is prior art under the AIA than under the previous regime, the grace period that remains is so infinitesimally narrow that it would be malpractice to suggest the AIA ushered in anything other than an absolute novelty system, there are a trio of new post grant procedures aimed at making it easier to strip patent rights away from owners, and several categories of invention were explicitly made unpatentable. The AIA was hardly the panacea that it was sold to be.

But legislative changes to the patent system are not the most significant blows suffered by the innovators who require strong patents in order to obtain financing and have any kind of chance against the large corporations that would love nothing more than to take their inventions without remuneration. The Courts are where the most dramatic changes to patent law have come, starting back at least as early as 2005 when the Supreme Court rendered its decision in eBay v. MercExchange. That ill-considered decision turned a patent, which had been an exclusive right, into some kind of a ghostly remnant of its former self. Thanks the eBay it has been extremely difficult, if not impossible, to obtain an injunction even after proving infringement and withstanding all invalidity challenges. The irony is that strong patents that have been infringed are really no longer capable of supporting exclusive rights. See The Impact of eBay v. MercExchange. What good is a patent without an injunction against an infringer?

We have written much about the similarly ill conceived string of Supreme Court patent decisions in KSR v. Teleflex, Bilski v. Kappos, Mayo v. Prometheus, Association of Molecular Pathology v. Myriad Genetics and the most recent debacle in Alice v. CLS Bank. All of these decisions show a consistent and disturbing trend – patents in America are presumed valid only so long as they have not yet been considered by the U.S. Supreme Court. Once a patent has reached the Supreme Court you can rest assured that it will be deemed either patent ineligible or obvious. The only exception seems to be if you hire Seth Waxman from WilmerHale to represent you. He has three impressive wins over the last decade, two for Monsanto and one for a small tech entrepreneur named i4i.

The value of any patent is based on its enforceability. If a patent is not enforceable it has no value. Likewise, if a patent is enforceable but isn’t capable of being used to exclude activity by an infringer than the patentee is at the mercy of those recalcitrant infringers large enough to force patent owners to play their brand of a patent war of attrition. Without the threat of an injunction even a valid patent can provide nothing more than an uncompetitive royalty stream, and that is if the patentee can last through the fight and then the inevitable additional rounds of fighting. Without the leverage of an injunction infringement becomes an efficient means of acquiring innovation at below market price. Of course, the infringer only has to pay anything if they lose.

Patent litigation has always been a risky proposition for inventors, start-ups and small businesses. It diverts attention and resources to a legal battle where the winner can prevail simply by being the last one standing. Of course, as we have unfortunately seen many times over the last several years, it is possible (if not probably) that an innovative patentee will prevail in contests at the Patent Office, in litigation at the district court with both district court judges and juries finding infringement and upholding the validity of patent claims, only to have the Federal Circuit conclude that no reasonable person could ever reasonably believe the patent claims are valid. Never mind that every other decision maker in the process found the claims infringed and valid.

It has been several generations since Congress has enacted changes to the patent laws that gave greater rights to innovators, the Supreme Court today is reminiscent of Courts in the past that had never seen a patent that contained valid claims, and the Federal Circuit is infatuated with de novo review and willingness to rubber stamp invalidity decisions parroting the Supreme Court’s intellectually dishonest and logically inconsistent tests. As long as the Federal Circuit continues to think that the district court litigation is nothing more than an opening act or dress rehearsal we are in trouble. More alarming, however, is the Federal Circuit abdication its own constitutional responsibility to interpret the statutes that make up the Patent Act. Someone on the Federal Circuit needs to stand up and explain the Supreme Court is wrong. When Justice Thomas in Myriad says that discoveries are not patent eligible another federal judge with life tenure needs to say NO! The statute says the exact opposite. Discoveries are patentable and a statement to the contrary is not controlling law even if made by the Supreme Court because the Justices of the Supreme Court have no constitutional authority to rewrite the statutes they are interpreting. If the statute is not unconstitutional it needs to be applied as written, period.



Here Come the Super Patent Trolls

Litigation and patent reform trends indicate patent owners have increasingly fewer options. With the near universal vilification of non-practicing entities, most who are research and development companies, Universities or independent inventors, public sentiment has turned against innovators to the point where they are viewed much as a villain from a Marvel movie. There is no doubt that there is true evil in the patent litigation space, but the patent system is not the cause, and shouldn’t receive the blame. The patent system fosters innovation, it doesn’t prohibit innovation. (See here, here, here, here and here) What inhibits innovation is a lack of capital, which unfortunately is the new norm due to the fact that many district courts simply do not use their considerable statutory and inherent powers to punish litigation abusers like they should.

A small number of bad actors engage in sending fraudulent and misrepresenting demand letters that seek several hundred or maybe one-thousand dollars to settle bogus patent infringement allegations. The independent Government Accountability Office study shows that 80% of patent litigation is brought by operating companies, and Lex Machina data from 2014 shows a steep decrease in patent litigation when compared to 2013 data. If you concern yourself with factual reality there is just no patent litigation explosion, let alone a non-practicing entity litigation explosion. There is, however, a concerning growth of fraudulent demand letters, but extortion has been a real world reality for as long as humanity can remember. If we want a solution to any industry problem it needs to address the problem, not make things more difficult for innovators.

Ironically, the effect of Silicon Valley so successfully convincing the public, the press, Congress and courts that there is a fictitious problem a key avenue of funding for innovators has been cut off. Patents have historically been a property right. Today they still are loosely a property right, but as the walls of legislation and court decisions press inward the property right becomes continually more murky as we increasingly adopt what can only be characterized as a compulsory licensing regime, which is of course incongruous with the patent grant which is supposed to be an exclusive right.

Innovators have throughout time sought to invent and license, which then returns a crucial revenue stream to fund further innovation. The cycle repeats and society benefits. Today patents are under such pressure and those who license are so unfairly vilified that it has become ever more difficult to obtain a license even when there is clearly ongoing infringement. This forces the innovator to sue, which then feeds into the disingenuous narrative for those who are openly advocating for the demise of the patent system. This in turn causes the asset itself to be valued less, which then makes it harder to license for an appropriate sum without litigation, and the cycle repeats.

The net effect of this cyclical diminution in the value of patents makes it more difficult to make a business of research and development. It also oddly makes it more likely that the fictitious tales of the Silicon Valley elite will come to pass. As patents are worth less and less we will see forward thinking companies start to acquire massive patent portfolios like we have never seen before. Any student of history knows the patents are constantly swinging between stronger patent rights and weaker rights, so smart monetizers will acquire massive patent portfolios at a steep discount and wait for the law to shift, which won’t take long once we see Chinese companies invade Silicon Valley. Companies will be helpless to the invading Chinese companies because their patents all contain invalid claims. The shift back will be sudden when it happens, and patent accumulators will become super patent trolls the likes that we have never seen before. Unfortunately, the innovators will have received pennies on the dollar compared to investment and what the asset should be worth. Thus, the policies urged by the short-sighted high tech companies will create the very monster they say they fear. The pain will disproportionately be felt at first by the true innovators, who are the small businesses, start-ups and professional independent inventors. Hardly the type of American dream story about innovation we had become familiar with.


New Patent Monetization Models

In the wake of all of this uncertainty and outright vilification of inventors and the patent system, there are some in the licensing and monetization industry who are trying to bring meaningful financial innovations to the fore. Jay Walker and his initiative under the Patent Properties brand is seeking to create what he calls a Patent Utility. See here and here. They will collect the right to provide non-exclusive licenses. Walker will contribute his own hefty patent portfolio and is seeking to attract the portfolios of Universities and others who have patents that are wasting away and not being monetized. Through a sophisticated semantic search they will identify the top 100 patents most relevant to the licensee and provide a license for a low flat fee, and everyone no matter how big or small will pay the same low fee. If successful this will create new revenue streams for those with patent assets that are not being monetized and it will provide a cloak of certainty for the licensees who obtain affordable rights, which will insulate them and allow them to spend time innovating.

Another interesting innovation has also recently surfaced. The IP Finance Group of Fortress Investment Group, lead by Eran Zur, who co-founded RPX, is going to offer what could be characterized as mortgages for patents. The idea is to provide cash up front to the inventor or patent owner so that they can keep running their business, focus on creating jobs, delivering product to customers and innovating. Should the patent owner not be able to repay the loan secured by the patents pledged then Fortress would step in and use their expertise to monetize the patent.  The patent owner would receive proceeds in excess of the obligation after any monetization by Fortress.

A patent mortgage model would infuse cash into the start-up or small business at the front end of the lifecycle of the patent or portfolio, rather than under the existing model where cash would be obtained only after a long and protracted licensing negotiation that would almost certainly wind up ultimately requiring patent litigation.

It comes as a shock to many unfamiliar with the industry, but the truth is that high-tech companies refuse to negotiate licenses.  Lawyers for large tech corporations are like giddy schoolgirls at industry conferences, patting themselves on the back and laughing about “circular filing” letters inquiring about licensing and only engaging in talks if and when they get sued. That is a strategy, and I wouldn’t really have any problem with the strategy except for the fact that legions of lobbyists hired by these same tech companies descend on Washington, DC and tell Members of Congress and Staffers that they get sued without warning and are never afforded the opportunity to negotiate, which they claim they would gladly do. So there is reality and there are the lies told in Washington.

If you have a strong patent that is widely infringed you can expect to be dragged through the mud on a long, protracted and uncertain path to cash causes many start-ups, small businesses and inventors to go bankrupt. The patent mortgage concept, if successful, would be a breath of fresh air and make it more likely that innovators would grow, create jobs and take paradigm-shifting invention to market. It would also make it more likely for that growth cycle to repeat, which would benefit the economy.



With the climate so anti-patent, thanks in no small part to the ceaseless propaganda disseminated from some of the largest tech companies in Silicon Valley, patents as a whole in the high tech and biotechnology sectors are worth far less today than they were a few years ago. The largest tech companies have really shot themselves in the foot. You will not be seeing any patent portfolio acquisitions for the $4 billion paid for the Nortel portfolio, or the $12 billion paid for the Motorola portfolio, or even the $500 million paid for the Kodak portfolio. Patents are indeed an asset class, but for a variety of reasons patent value is at rock bottom. It is hard to imagine patent value going any lower.

The lack of value in a patent and the inability to obtain capital based upon successful innovations is going to have an enormous drag on the U.S. economy. Investors are not generally technically sophisticated, but they are very sophisticated in matters of finance. They know well that hundreds of thousands of patents, if not more, have been devalued. That means that it is harder for innovative start-ups to find capital because the truth is that investors love patents. Even if the start-up goes bust, which will happen to 90% of time, patents provide an asset that can be sold, licensed or repurposed to recoup at least some of the investment lost. Patents are a hedge against risk, and when patents are worth less that translates into a harder time finding capital. This in turn harms the economy because, as everyone knows, start-up companies and small businesses are the ones that overwhelmingly create new jobs.

At a time when we have lower job participation than at any time over the last generation, when we have never reached escape velocity from the gravitational drag caused by the Great Recession, it is practically treasonous for anyone to pursue policies that choke innovation and make it impossible for start-ups to succeed and grow. Paying lip service to the importance of innovation is nice, but hardly helpful. We need elected federal leaders and federal judges to wake up and realize what is staring them in the face. It is unthinkable, but the United States is no longer the most favorable jurisdiction for innovative start-ups.

For the foreseeable future, given the reality of a completely dysfunctional federal government and judges more interested in being legislators, we can hope that thought leaders with new patent monetization models can provide a solution that will keep innovators inventing and society benefiting from the fruits of their labors.


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Join the Discussion

2 comments so far.

  • [Avatar for Curious]
    November 5, 2014 12:21 pm

    Just a couple of thoughts of the “new” monetization models.

    everyone no matter how big or small will pay the same low fee. If successful this will create new revenue streams for those with patent assets that are not being monetized …
    Giving away technology for pennies on the dollars? That doesn’t sound like a good money making strategy to me. Also, unless the patent holder is both willing and capable of suing an infringer, in today’s anti-patent climate, I don’t see why anybody would take a license — no matter how small.

    As for Fortress, they only help operating companies pay for ongoing operating costs — not to monetize the patents per se. Moreover, Fortress is asking for rates of return typical for an unsecured, high-risk loan (i.e., multiples of the cash loaned) for what is, in essence, a secured loan. Great for Fortress if they can do the deal, but I suspect that the operating company can find (much) cheaper money elsewhere.

    In today’s patent environment, if you are big (i.e., lots of patents and money to fund litigation/licensing), then you can still make money on your patents. However, if you are small, good luck monetizing those patents. The most recent changes in the patent system will undoubtedly harm innovation. Since it has become incredibly difficult to monetize patents, their alienability (and hence their value) has taken a huge hit. When innovation (and the patents derived therefrom) fail to generate revenues, people will invest less in innovation. Its a simple business decision — you don’t put money into an endeavor unless the rate of return justifies the investment.

    There was time when the value of a patent was more than monetary — i.e., the ability to keep other players out of your market. However, with eBay v. MercExchange, the Supreme Court made it much more difficult to get an injunction.

    It is a sad time to be an innovator (or be associated with those that are). Once can hope that the pendulum will start to swing the other way, but if Congress passes the Goodlatte Innovation Act in its current form, it may signal that the pendulum is still picking up speed.

  • [Avatar for Nick White]
    Nick White
    November 5, 2014 04:23 am

    This is a great piece. What I have seen over recent months is that people are beginning to recognise what I have recognised for years that the real problem is the power of the Patent Gorillas.

    I have no serious problems with sharpening up patent eligibility. There are plenty of US patents that are frankly a complete laughing stock.

    No the core anti-patent issue is the Patent Gorillas and the prevailing culture in the US of “economic infringement”. For obvious reasons a blog such as this is focused on the US perspective but the US patent system is for ALL companies and inventors wherever they reside in the world. Around 50% of US patents don’t belong to US companies or inventors. That international perspective is often overlooked and the impact in that area is a serious problem for US innovation and enterprise.

    The utter contempt that the Patent Gorillas have for any patent whether it be in the hands of an NPE or SME or small inventor is the root problem for the US system. They really suffer no harm through this contempt no matter how much they bleat about NPE litigation (they never get sued by Trolls).

    This contempt is undermining invention, is undermining innovation and ultimately is undermining US enterprise AND as important to the USA it undermines the interests of that large number of non-US innovators who seek to secure US patents (on real inventions) and to do business in the USA.

    eBay is the key problem and the fact that Patent Gorillas have the deep pockets and of course utter contempt of the system to play the game that is economic infringement in US patent litigation.

    At the same time they simply don’t care about securing injunctions. They don’t need them. An arsenal of junk patents pointed at an SME with the threat of a lifetime of pain is often more than enough to get their way.