A Modality for Defining Patent Monetization Companies

Nicole Shanahan

Patent monetization companies are largely to blame for the inefficiencies in the patent marketplace today.  Many scholars, academics, and private research institutions have attempted to understand just how bad things have gotten, and that research has received deserved attention from the government, including President Obama who has been vocal on patent law reform.[1]  However, one of the largest problems with the patent reform discussion is the difficulty with terminology related to the business activities of patent monetization companies.  What still is not well understood from the depths of data explaining the fiscal impacts of our patent system is a comprehensive modality for precisely detailing the business model a patent monetization entity utilizes.  To adequately define and categorize these entities’ impact by their practices, a granular understanding of their behavior is necessary.

In an expanded paper entitled “Deconstructing the Patent Bubble: An Exploration of Patent Monetization Entities from Sewing Machine Combination to Rockstar Bidco,” I survey the history of commercial patent monetization since the first large-scale patent consortium formed in the1850s.[2]  In doing so, it became clear that there is a traceable evolution of patent revenue generating techniques.  Figure 1 below shows this progression, and the remaining portion of this article explains how these various business models operate with specific examples of each.  Noticeably, the new patent monetization entities have chosen from the ranks of prior models to create flexible, hybrid entities.[3]  By virtue of their immense diversity and numbers, these entities will be challenging and labor intensive to analyze under the proposed Saving High-Tech Innovators from Egregious Legal Disputes Act (SHIELD Act) and other legislative reform requiring courts to issue legal proceedings based on entity type.[4]

Figure 1: Evolution of Patent Monetization Entities by Practices

Evolution of Patent Monetization

 

1. Patent Consortium Model

Over a hundred years before the world came to know the term “patent troll,” the first strategic patent pool was formed to cover sewing machine technology.[5]  Patent pools, also known as consortiums, are among the oldest and longest surviving aggregation business models that continue to flourish today.  They are formed via an agreement between several companies who pay fees to aggregate and share licenses to valuable patents containing overlapping claims.  Sewing Machine Combination was the first known patent consortium that participating members leveraged as a means to overtake non-member competitors.[6]  Operating during a period known as the “sewing machine wars” between 1856 and 1877, when its last patent expired, Sewing Machine Combination provides an important historical example of how patent owners can escape commercial gridlock, and unleash productivity and innovation via cross-licensing agreements.[7]

While Sewing Machine Combination made it possible for the sewing machine manufacturers to start making and selling sewing machines, rather than working full-time on suing each other out of existence, it has yet to be seen whether modern consortiums provide the same level of innovation.[8]  In the smartphone industry, such attempts at efficient consortiums have just recently started to ramp up, but despite the existence of a few large smartphone consortiums, the rate of smartphone litigation continues to rise.[9]  The aftermath of the sale of Nortel Networks’ patent portfolio to Rockstar Bidco exemplifies how smartphone consortiums have served to create competitive patent thickets, known popularly as the “Smartphone Wars.”[10]  Current trends support the conclusion that the consortiums are serving valuable strategic purposes that help smartphone companies enter and compete in the marketplace through patent partnerships.[11]

If done correctly, the pro-competitive benefits of a successful smartphone consortium will outweigh any anticompetitive effects by promoting healthy industry competition, while still upholding licensing commitments such as those required under standards setting organizations.[12]  For example, Google’s adversarial relationship with the Rockstar Bidco consortium (consisting of Apple, Microsoft, RIM, Sony, Ericsson, and EMC) presents a unique opportunity to re-assess the treatment of standard-essential patents existing within competitive patent thickets.[13]

2. Lemelson NPE Model

While Non-Practicing Entity (NPE) patent litigation has been around for over 150 years, the first corporate-level patent monetization operation originated from Jerome Lemelson in the 1960s.[14]  This famed inventor described having patented “anything that came to mind,” and incorporated the Licensing Management Corporation in order to bring to market patents under his name as well as other independent inventors.[15]  Lemselon was the first person to use patent development as a business model, by hiring in the place of engineers and business people, an “army of patent attorneys” dedicated to drafting and prosecuting patent applications.[16]  He was one of the first to make use of contingency fee litigators and by the 1980s inspired several others to adopt the same business model.[17]

Among the most notable “Lemelson patent development companies” today are Rambus and Tessera.[18]  While Rambus generally receives less criticism from hardline NPE critics compared to other patent assertion entities because of their relatively high focus on research, Rambus has been involved in its fair share of controversy.[19]  Founded in 1990 as a chip developer by two inventor-professors, Rambus started as a licensing company that provided, in addition to patent licenses, the services of engineers to assist chip companies in their development of Dynamic Random-Access Memory (DRAM) technology.[20]

There are several companies that started as operating companies (in the business of making and selling actual products) but due to financial contraints or strategic purposes, opted for a strictly Lemelson approach.[21]  The largest of these entities is Tessera, who started as a manufacturer of semiconductor packaging.[22]  Today, Tessera no longer manufactures products and has been actively asserting patents not just in the federal courts, but also at the U.S. International Trade Commission (ITC).[23]  Tessera’s use of the ITC as a forum to pressure companies into paying licensing fees exemplifies how patent monetization companies have leveraged the ITC’s arguably lower standard for issuing injuctions.[24]

3. Acquire & Assert Model

The patent marketplace developments in the late 1980s to early 1990s were probably the most significant in terms of bolstering the NPE model.  Models built entirely on patent acquisitions and the transactions created by brokerages and auction houses made the patent marketplace a much more dynamic place.  The availability of entire portfolios paired with the greater availability of contingency fee litigators such as Raymond Niro (for whom the term “patent troll” was apparently first coined) meant that a patent monetizer no longer had to invest in engineers, patent attorneys, or technologist of any sort.[25]  The average cost of taking a company to court dropped dramatically and the speed at which these companies saw profits was staggering.[26]  Compared to the traditional Lemelson model that took much more time and investment, the acquisition-assertion model eliminated many of the barriers to entry of becoming a patent holding entity.[27]  Given the relative lack of transactions in the marketplace previously, these entities were able to pull from a larger pool of patent holders willing to sell their property.  These sellers included individual inventors unable to find contingency fee lawyers, failed start-up companies, or companies looking to partner with an assertion entity.[28]

Companies operating under the acquisition-assertion model are effective because of the economics surrounding patent litigation.  For example, in Texas it could cost an accused infringer more than $2.5 million to litigate a case with $1 to $25 million at stake.[29]  Discovery alone could cost as much as $1.5 million.[30]  The risks companies face when responding to infringement demands include massive litigations costs, the risk of a damages payments far greater than an early settlement payout and, worst yet, an injunction against their product.[31]  On the other hand, the patent holding company operating under the acquisition-assertion model has discovery obligations that are much smaller, oftentimes throwing together a handful of documents from the acquisition.[32]

4. Publicly Traded PMEs

Publicly traded Patent Monetization Entities (PMEs) run the gamut in terms of how they develop patent portfolios and the means by which they monetize them, but they deserve a unique category because they are subject to higher public scrutiny and generally rely on more stable patent revenue models.  There are currently seventeen PMEs listed on the public market.[33]  Another four PMEs who were once listed have since become delisted for various reasons.[34]  The group as a whole has seen high volatility on the stock market.[35]  The remaining publicly listed PMEs have lost substantial value since their IPO and have struggled to post profits for investors.[36]

After reviewing the list of companies and their past stock performance, it becomes clear that PMEs are more successful if they have many moderate sized wins versus a few large wins.  Thus, success becomes a matter of transaction volume: more portfolios mean more potential lawsuits and licensees as well as a guaranteed pipeline of royalties.  Other factors among the most successful publicly traded PMEs (such as Acacia, Interdigital, VirnetX, Universal Display, and Tessera) include: a diversity of patents covering a range of technologies, portfolios containing Standard-Essential Patents (SEPs), portfolios covering the mobile and semiconductor industries, portfolios that include patents in Europe and Asia, and regularity in launching new lawsuits.[37]  Alternatively, characteristics pertaining to struggling publicly traded PMEs include a change from an operating to non-operating model that fails to acquire new portfolios (TIVO, Document Security Systems, Wi-LAN, Opti, Inc., and Worlds, Inc.), a considerably high IPO valuation (RPX Corporation, Vringo), and attempting to go from a non-operating to operating model (Democrasoft, Asure Software).[38]  A full list of publicly traded NPEs as well as their classification is included in Table 1:

Table 1. Summary Chart of Public PMEs[39]

Chart of Public PMEs

5. The Hybrid PME

What makes modern PMEs interesting is their ability to articulate, execute, and sell hybrid monetization models.  The most famous of these, receiving their fair share of attention by both the media and scholars, are Intellectual Ventures (IV) and RPX Corporation.[40]  Interestingly, two of the founders of RPX Corporation previously worked at IV and all of the founders from both firms taken together have experience in every one of the models discussed above.[41]  Intellectual Ventures was founded in 2000 by Nathan Myhrvold and Edward Jung, both of whom formerly served in high-level positions at Microsoft.[42]  RPX Corporation’s John Amster and Geoffrey Barker were both former vice-presidents at IV and worked closely with Myhrvold in developing the company’s software licensing strategy.[43]

Both companies have had huge success raising private funds to finance portfolio development and in doing so, have come to own massive portfolios in a short amount of time.[44]  While today IV practices a combination of patent development (early Lemelson Model) and acquisition (Acacia’s model), it originally attracted financial backing from the companies that are now the target of its revenue model.[45]  With $5 billion in funds and an estimated 40,000 patents and patent applications, IV is the largest NPE in the world.[46]  While RPX Corporation has a portfolio that is just a fraction of that size, it also had early success attracting venture capital funding and support from early members, the first of which was Cisco (whose former head of patents, Mallun Yen, is now RPX’s executive vice-president).[47]  RPX Corporation has spent over $700 million to acquire approximately 3800 patent assets across several industries, most notably mobile handsets.[48]

Both IV and RPX view themselves as providing essential financial services, instead of legal services—a  distinction that presents obvious implications.  Nathan Myhrvold has often called his $5 billion in investments a venture capital fund,[49] and RPX formally changed their industry sector from legal services to financial services in 2009.[50]  Some researchers have estimated that for a $5 billion dollar fund to be successful, it would take at least $40 billion in returns over a ten year period (last year IV earned just barely $2 billion in revenue).[51]  This means IV will need to engage in high yield transactions that will likely require taking many more companies to court per year.  In contrast, RPX’s business model requires it to get the lowest possible price for “high litigation risk” portfolios,[52] but since prices must remain competitive for patent owners in order for them to make a deal with RPX in the first place, their cost saving services have nothing to do with the actual deal, and more to do with replacing lawyers’ fees.

6. Conclusion

Given the various differences in the way patent monetization companies operate, the government should pay special attention to the relative value of each practice. Some models provide a greater public benefit to others, but all seem to benefit from a market environment in which nuisance-based lawsuits remain the most attractive liquidation option.

 


Preferred citation: Nicole Shanahan, A Modality for Defining Patent Monetization Companies, 30 Santa Clara High Tech. L. J. Online (2014), http://law.scu.edu/high-tech-law-journal/a-modality-for-defining-patent-monetization-companies/

* The Online Edition of the Santa Clara High Technology Law Journal is an independent scholarly legal publication founded in 1984 by the students of Santa Clara University School of Law. http://digitalcommons.law.scu.edu/chtlj/

[1] See e.g., Edward Wyatt, Obama Orders Regulators to Root Out “Patent Trolls”, the new york times (June 4, 2013), http://www.nytimes.com/2013/06/05/business/president-moves-to-curb-patent-suits.html?_r=0 (“Mr. Obama ordered the Patent and Trademark Office to require companies to be more specific about exactly what their patent covers and how it is being infringed. The administration also told the patent office to tighten scrutiny of overly broad patent claims and said it would aim to curb patent-infringement lawsuits against consumers and small-business owners who are simply using off-the-shelf technology.”).

[2] Nicole Shanahan, Deconstructing the Patent Bubble: An Exportation of Patent Monetization Entities from Sewing Machine Corporation to Rockstar Bid Co., (Working Paper, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2359912.

[3] Id. at 22.

[4] Ryan Davis, Wide-Ranging “Patent Troll” Bill Floated By Top Lawmakers, law 360 (May 24, 2013), http://www.law360.com/articles/444815/wide-ranging-patent-troll-bill-floated-by-top-lawmakers (“Many in Congress appear anxious to take action against patent trolls.  Similar bills introduced in Congress this year include the Shield Act and the Patent Quality Improvement Act.”).

[5] Adam Mossoff, The Rise and Fall of the First American Patent Thicket: The Sewing Machine War of the 1850s, 53 Ariz. L. Rev. 165, 170 (2011).

[6] Id.

[7] Id.

[8] Id. at 196 (citing Don Bissell, The First Conglomerate: 145 Years of the Singer Sewing Machine Company 87 (1999) (“[E]vidence abounds that indicates these main players also cooperated in price fixing and in other mutually beneficial policies”)).

[9] In one survey, Fish & Richardson saw a 29% increase in cases in 2010 and Finnegan, Henderson, Farabow, Garrett & Dunner saw its patent litigation caseload increase by almost 47%.  See Sam Favate, Patent Trolls And Smartphone Wars Mean More Litigation – Survey, Wall St. J. L. Blog (Dec. 1, 2011), http://blogs.wsj.com/law/2011/12/01/patent-trolls-and-smartphone-wars-mean-more-litigation-survey/.

[10] See Thomas H. Chia, Fighting the Smartphone Patent War with Rand-Encumbered Patents, 27 Berkeley Tech. L. J. 209, 213 (2012).

[11] Id.

[12] Id. at 240.

[13] Id.

[14] About Jerome Lemelson, Lemelson-MIT, http://web.mit.edu/invent/w-lemelsonbio.html (last visited Jan. 24, 2013).

[15] Id.

[16] Colleen V. Chien, From Arms Race to Marketplace: The Complex Patent Ecosystem and Its Implications for the Patent System, 62 Hastings L. J. 297, 311-12 (2010).

[17] Id.

[18] Id. at 328.

[19] Rambus has avoided being termed a “patent troll” and NPE by many academics including Robin Feldman, Mark Lemley, and Colleen Chien.  See Colleen V. Chien, Of Trolls, Davids, Goliaths, and Kings: Narratives and Evidence in the Litigation of High-Tech Patents, 87 N.C. L. Rev. 1571, 1577-78 (2009) (“The term NPE generally refers to a patentee that does not make products or ‘practice’ its inventions.  Over time, the definition has been narrowed to exclude actors in the innovation enterprise who engage in significant research and development activities and individual inventors who seek to commercialize their inventions.”).

[20] Micron Technology, Inc., v. Rambus Inc., No. 2009-1263, 2009 WL 2356599 (Fed. Cir. July 2, 2009).

[21] Chien, supra note 16, at 321 (“According to a common progression, patents acquired defensively to protect product revenues are turned into assets to generate patent revenues.”).

[22] Company Overview, Tessera, http://www.tessera.com/abouttessera/companyoverview/Pages/companyoverview.aspx (last visited Jan. 16, 2013).

[23] Taras M. Czebiniak, When Congress Gives Two Hats, Which Do You Wear? Choosing Between Domestic Industry Protection and IP Enforcement in § 337 Investigations, 26 Berkeley Tech. L. J. 93, 114 (2011) (“Cisco, Google, and Verizon wrote that because § 337 ‘is a trade statute focused on protecting domestic productive industries, not mere legal rights,’ litigation fees should not count at all towards that requirement.  A submission by other technology companies argued that the Commission should adopt a standard which requires investments probative of exploitation.  Arguing for the other side, Tessera focused on the IP rights enforcement mandate set by Congress, stating that Congress had tasked the ITC with ‘protecting the intellectual property rights of American innovators.’  Each side thus invoked one of the ITC’s mandates: the technology companies argued that the agency should stick to its trade roots, while Tessera pushed the Commission to be an IP enforcement forum.”).

[24] Jose M. Recio, A Change in Establishing the Domestic Industry Requirement at the International Trade Commission, 39 AIPLA Q. J. 131, 134 (2011) (“Unlike federal courts, which must adhere to eBay and apply a more stringent test for granting injunctive relief, the ITC can apply its own injunctive relief standard.  Therefore, NPEs wishing to seek an injunction, a formidable remedy in litigation, will likely consider the ITC an indispensable component of patent litigation.  This is because the ITC forum avoids the more stringent injunctive relief test applied in federal district courts.”).

[25] Mike Masnick, The Infamous Niro JPEG Patent Smacked Down Again, TechDirt (June 30, 2009), http://www.techdirt.com/articles/20090628/1533475384.shtml.

[26] Id.

[27] Jennifer Kahaulelio Gregory, The Troll Next Door, 6 J. Marshall Rev. Intell. Prop. L. 292, 294 (2007) (“Even if the Patent Troll’s targets decide to put time and money into litigating the claim, the troll has usually acquired the patent for a nominal fee and has far less at stake than its opponent in a typical suit.  If the court finds no infringement or even invalidates the patent, the Patent Troll may nonetheless retain licensing fees previously collected from others for the patent.”).

[28] Id. at 298 (“Ware patented his identification card system invention in 1987, but failed to generate any revenue from it until Acacia Research Corporation called him in 2004 and offered to help.  Acacia contacted Ware when they noticed that a portion of his patent covered the use of a unique number to identify each credit card transaction.  Acacia successfully collected millions of dollars in licensing fees from about thirty companies for Ware.  Ware claims that without Acacia’s help, he never would have been able to afford to enforce his patent against the alleged infringers.”).

[29] Ho-Sung Chung, The Supreme Court Unjustly Declares Open Season on Patent Dealers, U. Ill. J.L. Tech. & Pol’y 227, 230 (2009).

[30] Id. (citing Craig Tyler, Patent Pirates Search for Texas Treasure, Texas Lawyer (Sept. 20, 2004), http://www.wsgr.com/news/pdfs/09202004_patentpirates.pdf (“[A] defendant may consider it a win to settle a suit early by paying between $200,000 to $300,000 for a guaranteed result — a license to the patentee in order to continue business as usual — rather than spend 10 times that much in legal fees with no certainty of winning and real exposure to being hit with a huge monetary judgment.”)).

[31] Id.

[32] Id.

[33] Based on the author’s research.  See supra Table 1 for a full list of publicly traded NPEs as well as their classifications.

[34] See Shanahan, supra note 2, at 19 (“These four include Affinity Technology Group (Decisioning.com Inc.) who went bankrupt in 2008; Intertrust Technologies Corp, delisted in 2003 was acquired by a private joint venture of Philips, Sony and Stephens Inc. in early 2003; LecTec Corp was acquired by AxoGen in 2011, a company that does produce and sell products; and Mosaid Technologies Inc. was delisted from the Toronto Stock Exchange in 2011 for poor performance.”).

[35] Id. While four of the twenty-one PMEs have been delisted, many of the remaining seventeen have lost substantial value since IPO and have struggled to post profits for investors.

[36] John Vincent, Asure Software: Transforming a Class Patent Troll, Seeking Alpha (Nov. 15, 2007), http://seekingalpha.com/article/54325-asure-software-transforming-a-classic-patent-troll.

[37] The research conducted on publicly listed patent monetization companies is an extension of the research methodology first employed by James Bessen, Jennifer Ford, and Michael Meurer.  See Bessen, Ford, & Meurer, 34 The Private and Social Costs of Patent Trolls, Regulation, Winter 2011-2012, available at http://www.cato.org/pubs/regulation/regv34n4/v34n4-1.pdf.

[38] Id.

[39] Id.

[40] Robin Feldman & Tim Ewing, The Giants Among Us, Stan. Tech. L. Rev. 1, 81-82 (2012).

[41] John Amster and Geoff Barker teamed up with Eran Zur, a who spent the previous decade at Lemelson Medical, Education and Research Foundation (the current manifestation of Jerome Lemelson’s NPE that today practices a hybrid acquisition/development model).  See Matt Asay, Net Patent Aggregator RPX may have a Oedipal Complex, cnet News (Nov. 24, 2008), http://news.cnet.com/8301-13505_3-10106389-16.html.

[42] Leadership, Intellectual Ventures, http://www.intellectualventures.com/about/leadership (last visited Dec. 17, 2013.)

[43] Speakers, IPBCChina, http://www.ipbusinesscongress.com/China/2012/Speakers.aspx#Geoffrey_Barker (last visited Jan. 24, 2013).

[44] IV has raised approximately $5 billion in funds and has a portfolio of 40,000 patent assets.  See Jim Kerstetter & Josh Lowensohn, Inside Intellectual Ventures, The Most Hated Company in Tech, cnet News (Aug. 21, 2012), http://news.cnet.com/8301-13578_3-57496641-38/inside-intellectual-ventures-the-most-hated-company-in-tech/.

[45] Id. These early investors include Microsoft, Intel, Sony, Nokia, Apple, Google, and eBay.

[46] Id.

[47] Amy Miller, Former Cisco IP Vice President Mallun Yen Moves to RPX Corp., The Recorder (Nov. 17, 2010), http://chipslaw.org/wp-content/uploads/2012/09/501081208RPX.pdf.

[48] Growing Portfolio, RPX Corporation, http://www.rpxcorp.com/index.cfm?pageid=21 (last visited Jan. 24, 2013).

[49] Kerstetter & Lowensohn, supra note 44.

[50] RPX Corporation made this change prior to filing for their IPO.  They are currently listed as a financial services company on their website and related business listings.  See RPX Corporation, linkedin.com, http://www.linkedin.com/company/rpx-corporation (last visited Dec. 16, 2013).

[51] Kerstetter & Lowensohn, supra note 44.

[52] Feldman & Ewing, supra note 40.