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«Research commissioned by the Intellectual Property Office, and carried out by: Martin Brassell, Kelvin King This is an independent report ...»

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Whilst NPEs who are OPAs have a number of detractors, often being associated with the term ‘patent trolls’, many small inventors facing difficulties in bringing their IP to market and who are not able to access finance for commercialisation themselves have found access to a NPE beneficial. Some OPAs are start-up companies, some are spin-offs from major corporations, and some are manufacturing or research organisations seeking to extract value from IP and patents they might not use any more, including Papst Licensing.

The Papst story is instructive. Papst Motoren was a leader in electric drive technology for tape recorders, hard disk drives and electronic cooling applications based in Germany. Faced with massive infringements in the 1980s, predominantly from Asian companies, the company’s lenders forced the sale of the business in 1992, but did not value the IP portfolio, which included more than 600 patents and patent applications. Georg Papst bought back the patent portfolios, founded Papst Licensing, and concluded more than 160 licensing agreements with many wellknown IT and electrical engineering companies, including all current HDD manufacturers.

NPEs with the largest patent holdings as at January 201192 include Intellectual Ventures, Ground Rock Research, Interdigital, Wisconsin Alumini Research Foundation, IPG Healthcare 501 Ltd, Rambus, Tessera Technologies Inc, Mosaid Technologies Inc, Acacia Technologies, Jerome H Lemelson, Commonwealth Scientific and Industrial Research Organisation, Scenera Research LLC, WiLan, Papst Licensing, GmBH, Altitude Capital Partners, Intertrust Technologies Corp, Rembrandt IP, Innovative Sonic Ltd, Alliacense, IpVenture Inc, Tronteck Licensing Inc, Cheetah Omni LLC, Patent Category Corp, St Claire Intellectual Property Consultants Inc, Illinois Computer Research, Innovation Management Services LLC, MobileMedia Ideas LLC and MicroUnity Systems Engineering Inc.

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In terms of their activity levels by number of counterparties and litigations93, the leading NPEs as of 2010 are Acacia Technologies, Plutus IP, Ronald A Katz Technologies Licensing, ArrivalStar, WIAV Solutions LLC, Scenera Research LLC, Jerry Harthcock, Leon Stambler, Technology Patents LLC, Sorensen Research and Development Trust, Guardian Media Technologies, Millennium LP, Catch Curve Inc, F & G Research Inc, Rates Technology Inc, Jerome H Lemelson.

The total litigations between them, between 2005 and April 2010, have been reported as 2,162.

Of all NPEs, Intellectual Ventures94 (IV) is perhaps the best known. It is a partnering network of 4,000 inventors, purchasing patents from individuals and businesses or creating IV’s own inventions. It has reportedly spent approximately $2 billion creating one of the world’s largest patent portfolios, which in 2011 accounted for more than 30,000 patents mostly covering software, semi-conductors, communications and e-commerce.

Intellectual Ventures is structured as a series of funds: those for acquisition from individual inventors, those for small and large companies and those for its own inventions. In partnership with scientists its business includes that of developing and acquiring pre-filing inventions, mostly from universities in Asia through a variety of technology transfer deals.

As Harvard Business School reports95, the significant feature setting Intellectual Ventures apart from similar businesses is that many of its investors are strategic and include prominent technology companies such as Amazon, American Express, Cisco, eBay, Google, Intel, Microsoft (which was the lead investor), Nokia, SAP, Sony Samsung and Verizon.

Nvidia provides one example of a company which has invested in two of Intellectual Ventures’ ‘Invention Investment’ Funds and co-operated with them to improve its IP stable. Nividia is reported to have approached Intellectual Ventures in 2012 to support the acquisition of the IPWireless patent portfolio. This move was in part prompted by Nvidia’s previous purchase of Icera, a fabless semiconductor designer of 3G/4G baseband processors, operating in a similar area of technology The IPWireless patents had a long and complex transactional history, reflecting the fact that popular patents can change hands many times. However, whilst these particular patents had been assigned on a number of occasions, they had no history of generating income from licensing revenues. The motivation was therefore essentially strategic, protecting Nvidia’s position in a new market, whilst leaving open the option of benefiting from future licensing incomes.

NPEs change the dynamic of the IP marketplace because a manufacturer does not have the option of preventing them from trading with a competing product, as would often be the case in a dispute between manufacturers. Also, they have an information advantage because they do not have to reveal how they make their money in detail, which the large companies they target often do.

93 Ibid See www.intellectualventures.com 94 95 Intermediaries for the IP Market’, Harvard Business School working paper, Hagiu and Yoffie 2011 156 The role of intellectual property and intangible assets in facilitating business finance

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These patent pools generally purchase IP on behalf of investors (manufacturers and inventors) to mitigate risk for an annual fee, which also buys the investors a licence to use them. There are two different operating methods, exemplified by two of the best-known organisations operating in this space, RPX98 and Allied Security Trust99, both mentioned above. RPX is a commercial firm, whilst AST is a not-for-profit entity owned by its members (though interestingly, there is an overlap with RPX’s client list).

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The second model, used by AST, has been described as “catch and release”. AST is a memberowned trust whose members finance the acquisition of patents in which they are interested, deciding which ones to buy. They then license it, after which the rights can be sold on or (sometimes) donated. AST members include ARM, Avaya, Google, HP, IBM, Intel, Oracle, Philips, Sony and Research in Motion. This reflects a particular intensity in litigation activity in the ICT space, though the categories in which AST has interest are significantly broader.

One transaction at the end of 2012 provides an illustration of how defensive aggregators work.

MIPS Technologies’ operating business was purchased by Imagination Technologies, a UK graphics IP vendor, for $60 million, providing access to 160 engineers and 82 MIPS patents, and protecting royalties coming from current and future licensees. Separately, ARM led a consortium called Bridge Crossing, an acquisition vehicle for AST, buying the rights to the MIPS portfolio totalling 498 patents, paying $350 million in cash, of which ARM itself contributed $167.5 million. Industry commentators have observed that this strategy addressed the risk to AST investors that MIPS would be acquired by a ‘troll’ and broken up into separate units with litigation consequences.

DPAs can be seen as helping the market because they provide a way to resist NPE activity. They also assemble pools of patents which make it easier for new entrants to enter the market legally, leading ultimately to more competition in downstream markets. Overall, the demand that has been created for quality patents from this new activity would appear to be good for IP values, and also good for the mechanics of enforcement – though it should also be pointed out that

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patent trolls have sometimes been associated with ‘hold-up’ tactics where a patent of questionable quality is used to slow down the progress of a target company.

IP trading platforms Intellectual Property Exchange International (www.ipxi.com) in the US is a recently opened public exchange that allows IP rights to be traded as a commodity; it is the world’s first financial exchange for licensing and trading intellectual property rights. The first contract offering took place in June 2013.  

To quote from its website:

The mission of IPXI is to meet the price discovery, transaction efficiency and data distribution needs of intellectual property owners, investors and traders by creating the central marketplace for tradable IP assets.  IPXI is funded by a group of US and European investors, including CBOE Holdings Inc (NASDAQ CBOE) and Koninklijke Philips NV (Philips).

The product traded is called a unit license right and allows the holder to use the underlying technology a certain number of times and it is this that is sold by IPXI.  IPXI has attracted considerable interest within the US, with the US Department of Justice looking closely at its potential effect on competition. Approached for its enforcement intentions, the department declined in March 2013 to state these because “we simply do not know enough to conclude that IPXI’s activities, once operational, will not raise competitive concerns.” However it did acknowledge that “the proposed exchange could create efficiencies to benefit the IP marketplace and boost innovation, including through increased licensing efficiency, sublicence transferability and greater transparency100.” As a non-exclusive price-discoverable market, if a significant number of buyers and sellers use IPXI, this could prove to be an effective way of addressing the problem of a lack of liquidity and transparency in the IP market place.

Tynax www.tynax.com is a global technology trading exchange that brokers a range of technology related transactions whose clients range from SMEs, sole inventors to Fortune 100 multinationals, universities, industry associations research laboratories, government organisations and private equity firms. The Tynax exchange is adopted by the Patent and Intellectual Property Intermediaries Association (PIPIA) and facilitates sales and other transactions such as licensing from PIPIA members in the US, Asia, Europe and other markets.

http://www.ip-watch.org/2013/03/26/us-justice-dept-antitrust-concerns-over-ipxi-patentReported at exchange/ 158 The role of intellectual property and intangible assets in facilitating business finance

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In the technology marketplace, much attention has been paid to the very high prices paid to acquire key patent portfolios over the past few years. The Nortel portfolio, for example, was acquired for $4.5 billion in mid-2011 – equivalent to around $1 million per patent – in an auction process where the starting offer of $900 million was considered remarkable. It left a situation where the patent portfolio was worth more than the company which held them.

The circumstances at the time (when there was a great deal of patent litigation in progress) doubtless affected the price paid, but the market today remains more driven by litigation rather than freedom to operate considerations. Nevertheless, analysts now routinely recognise that much of the value attributed by the market to large technology-centric organisations is attributable to their patent portfolio. For example, an August 2013 article in the Wall Street Journal looking at BlackBerry101 focused on Scotiabank analysts’ views on the value of the company’s 5,100+ patent portfolio, concluding that this was likely to run into $billions in its own right.

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A number of other companies are active in the US in the technology area of patents. Examples include ThinkFire102, Epicenter IP Group LLC103, IP Value104 (with partners including BT, Xerox,

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PARC, MPT, Round Rock Research and NXP); IP Pluritas105 and Competitive Technologies106 are a few examples. The activities of some of these organisations were featured in a San

Francisco Business Times article107:

An expanding group of brokers has emerged in recent years to line up deals that can top $1 million apiece for companies or inventors selling patents covering all manner of products…IPotential LLC, a San Mateo broker, said it had a record-breaking year in 2007: 29 transactions produced more than $104 million for customers. Like most IP brokers, IPotential earns commissions in the double-digits on each deal.

There are no statistics on how much money is raised by selling patents. But U.S.

companies could reap $500 billion by 2015 from patent licensing, up from $110 billion in 2000, according to estimates from accountants at Ernst & Young.

Brokers in the Bay Area, some of whom were previously intellectual property lawyers, rely on contacts developed through deal making and other references to get the highest number of interested buyers. They must be careful not to reveal too much about either side of the transaction: buyers, especially large companies, prefer to remain anonymous until a deal is consummated, lest their identity lead a seller to jack up the price. A company selling a patent doesn’t want its name released for fear of tipping off competitors to strategy behind the sale. Increasingly, companies are buying patents for strategic reasons, said Ronald Laurie, managing director of IP brokerage Inflexion Point Strategy LLC of Palo Alto. “To fill holes in a (patent) portfolio, to counter in case of a lawsuit, for protection in a new market area.” To date, most auction and brokerage activity has been driven from the US, but it is interesting to note a growing level of UK-based activity. 2013 has seen the announcement of a new online auction platform, BVipr, which is establishing facilities for private brokerage and online auction

of IP assets:

In the UK today, a number of advisors provide a valuable IP service based on assisting companies in maximising value from their IP assets. This is more often than not in distressed situations or insolvency. We believe IP is not a ‘last resort’ for a business and represents value that should be put to work for a company through the life of the asset and the company. By creating an active and competitive marketplace for IP, we want to ensure that IP assets are recognised as highly valued assets to a company and are leveraged to the benefit of a company.

105 See www.pluritas.com 106 See www.competitivetech.net 107 San Francisco Business Times, 2008 160 The role of intellectual property and intangible assets in facilitating business finance

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