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NPEs Speak at the IP Business Congress 2009

By Peter Zura

On Tuesday at the IP Business Congress 2009, a breakout session was conducted on NPE's titled "Meeting the NPE Challenge" where NPE business models were discussed. On the plaintiff side, members of Acacia Technologies and Altitude Capital Partners presented their views on the NPE debate, and on the defendant side was RPX Corp. and Allied Security Trust.

For Acacia/Altitude, their business model is based on patent aggregation and is rooted in tapping revenue distribution from licensing - despite the fact that 60% of existing patents are owned by small entities, only 1% of licensing revenue flows to them. Since most small entities are unable (or unwilling) to license and enforce patented technologies, the end result is that 60% of patented R&D in the U.S. is sitting in disaggregated IP. This in turn creates inefficiency and waste in the market. This is where the patent aggregators look to fill the gap. To date, NPE's have raised over $6B in private capital to acquire patents for licensing and enforcement.

Both Acacia and Altitude pride themselves on diligence - each commented that enforcing weak patents "makes no rational business sense." Thus every patent gets reviewed by patent engineers, attorneys, and licensing executives to establish value and enforceability prior to any licensing efforts. As a result, many of the litigated patents are upheld in court (or at least survive summary judgment). And while NPEs continue to be disparaged, Acacia commented that operating companies have become "much more serious" and more open with them during negotiations.

On the other side was Allied Security Trust (AST) and RPX, both of which are self-described "defensive patent aggregators." In AST's case, their goal is to reduce patent assertion risks by diminishing the exposure of patents on the market. Similar to Acacia and Altitude, AST has a network of subject matter experts to analyze patents to determine their strength. When a particular patent is deemed of sufficient quality and value, they purchase the patent and offer licenses to interested parties. After holding the patent for 12 months, they turn around and sell the patent, subject to the license(s). AST has reviewed about 1200 patent portfolios totaling about 20,000 patents, but has only placed bids on 20-30 patents. According to AST, they win about 80% of the bids that they make. AST solicits members having annual revenues of $1B or greater, where, in addition to licensing costs, members share in the annual cost of administration (roughly $200k).

RPX works along the same lines as AST, but differs in two relatively minor ways: (1) unlike AST, RPX is run by outside investors (Kleiner Perkins Caufield & Byers and Charles River Ventures); and (2) RPX is also a subscription-based service. Membership fees range from $35K - $4.5M, depending on the size of the company, and any member will have access to the entire portfolio. So far, RPX claims to have acquired 350 patent assets totaling $90M in value. This action has led to 4 resolutions of active litigation, 3 resolutions of asserted patents, and 6 open-market purchases of patents that would have otherwise been asserted.

During the session, it was interesting to see that the room was mostly respectful - even mildly deferential - towards Acacia/Altitude (notwithstanding the fact that a fair number of attendees were in the IP buying/selling business). When Acacia was asked what they thought of the defensive aggregators, they responded that these recently-formed defensive models "validate what we have been doing for years" on the offensive side. Previously, large companies "wouldn't dream of talking to you" when non-litigious licensing attempts were made. According to Acacia, there now appears to be a growing recognition that reflexively dismissing a properly-vetted patent is not good business strategy. Interestingly, during Q&A, some corporate members in the audience even asked questions to the NPEs on how communication could be improved to facilitate negotiation of "legitimate" and "potentially valuable" patents.

It was a very engaging session, which left some serious questions needing answers. Specifically, the public perception of NPE's has currently been couched in terms of "bad" patents being asserted to extract "illegitimate" licensing fees. No doubt this practice exists and is a horrific drain on resources (even Acacia/Altitude disparaged such opportunistic litigation, claiming it "makes little business sense", but commented that it is a "dwindling" practice). However, what about the "good" patents? Suppose a particular NPE patent is independently reviewed by scientists and lawyers and is objectively determined to have innovative merit. What then?

(as a side note, Ralph Eckardt, from 3LP Advisors, and co-author of "The Invisible Edge: Taking Your Strategy to the Next Level Using Intellectual Property" was at the conference, but spoke at a different session. He had a good line about NPEs, which I will paraphrase: "People talk about working the invention as a prerequisite for IP protection, but does that make any sense? Do we deny protection for a composer because he doesn't perform the music? Do we deny an inventor protection on a windshield wiper because he can't start his own auto company? Do we deny protection to an architect because he doesn't build the building?")

Full post as published by Two-Seventy-One Patent Blog on June 25, 2009 (boomark / email).