Patent Monetization

What, Who and How

Introduction
! Patrick Anderson
! ! ! !

Licensed attorney JD from Michigan State BS in Mechanical Engineering Ive worked everywhere: ! Engineer for major auto supplier ! The IRS Contact: ! Paralegal for non-IP firm ! IP boutique Web: http://gametimeip.com Email: patrick@patentcalls.com ! In house for Fortune 100 Phone: 810-275-0751 ! Large GP firm Skype: Patrick.R.Anderson ! Solo practice Twitter: @PandersonPLLC ! Patent consulting firm

About Patent Calls

! Patent Calls is a patent analytics services firm specializing in:
!

Patent Analysis
! Relevancy ! Valuation

analysis

Patent Sourcing
! Strategic

needs analysis ! Acquisition opportunity creation

!

Litigation support
! Technology

based ! Testifying experts available

Agenda
! What is Patent Monetization?
!

What is patent monetization and how did we get here? The intermediaries that make it happen How patent monetization works A glimpse and what may be coming

! Who Can Help Me?

!

! How Does It Work?

!

! The Future?
!

WHAT IS MONETIZATION? - HOW DID WE GET HERE?

What Is Patent Monetization

Is It New?

Shortly after his return from England in 1849, Howe inspected some of the new sewing machines that were now on sale and he concluded that they infringed his 1846 patent. Regardless of what other features these new sewing machines may have exhibited, they used the central elements claimed in Howes patent. Since he was destitute, Howe required an investor to finance his patent infringement lawsuits, and he at last convinced George W. Bliss to invest in his litigation strategy (as well as purchase a one-half interest in Howes patent from a previous financial backer, George Fisher, who had not realized any return on his investment).FN At this point, Howe was ready to undertake his main preoccupationindeed, his main occupationfor the next several years: namely, suing the infringers of his patent for royalties.
FN: In exchange for a partial ownership interest in his 1846 patent, Fisher provided Howe with approximately $2000. Fisher thus sold his one-half interest to Bliss for approximately $3500. Id. 53 Ariz. L. Rev. 165, 183
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Litigation Is Not A Business Model

! Most inventors do not file applications with the purpose of conducting ex post licensing and/or litigating their patents.
!

Is Wal-Mart in business to acquire real estate and build expensive structures? Or is that an expense they justify because its the most effective means to sell their goods? Is QVC in business to answer phone calls? Or are operators an expense QVC accepts because their sales would suffer under a fully automated system?
From: http://gametimeip.com/2011/05/06/are-patent-assertion-companies-in-business-to-litigate/

! Inventors generally want to create patent develop sell.

!

Unfortunately, it doesnt always happen that way

So Why Dont They?

! For several reasons, this plan frequently fails:
! ! ! !

Lack of funding Market moves to quickly Patent Office moves to slowly Invention relates to components not final products

Howe, For Example:

53 Ariz. L. Rev 165, 176

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Does the order matter?

! Expected process:
!

Invention Patent License Production Sales Royalties Invent Patent Production Sales License Royalties

! Reality:
!

Less incentive b/c producer already has the know-how FUNDAMENTAL QUESTION: Should the order affect the fact of compensation itself? Or just the amount based on the value of the transfer?

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Meanwhile, its not 1850 anymore

! Large companies cant track every inbound licensing opportunity
!

One department might reject an opportunity while a month later another department builds its own solution.

! Product convergence combines previously unrelated inventions

!

Pocket computer combining day planner, camera, web browser, TV, video games, GPS and countless other tools. Traditional retail use software-based solutions to reach untapped markets.

! Technology allows businesses to expand their market size.

!

! Some companies are just evil

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Dont Believe Me?

! Howe quickly contacted Singer, asserting that the Singer Sewing Machine infringed Howes 1846 patent [and] demanded a $2000 royalty payment from I.M. Singer & Co. Singers characteristically hotheaded nature asserted itself: he argued with Howe, and then he threatened to kick him down the steps of the machine shop. ! Singers attorney wrote in an 1852 letter that Howe is a perfect humbug. He knows quite well he never invented anything of value. We have sued him for saying that he is entitled exclusively to use of the combination of needle and shuttle . . . .
53 Ariz. L. Rev. 165, 183-84

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Surely, Companies Are More Sophisticated Today? ! But Androids success has yielded something else: a
hostile, organized campaign against Android by Microsoft, Oracle, Apple and other companies, waged through bogus patents.

Taken from When Patents Attack Android, http://googleblog.blogspot.com/2011/08/when-patents-attack-android.html

! Barnes & Noble tried to convince the ITC it was illegal for Microsoft to charg[e] a licensing fee that is commensurate with the cost of licensing Microsofts own mobile operating system and to assert patents relate[d] to trivial design choices and implementation details.
Taken from the ITCs Initial Determination Granting Microsofts Motion For Summary Determination of Respondents First Affirmative Defense of Patent Misuse

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Traditional Licensing
! The process:
! ! ! !

Discover infringement Start a conversation Hire a lawyer File a lawsuit / get sued

Not always in that order!

! Problems:
! ! !

High stakes provokes a legal fight Volatile outcome (either get $100M or $0) Posturing: ! Patent owner says it will get an injunction ! Company says its worthless

Nevertheless, 80% end in settlement/license ! Consequence: Navigators wanted!

!
!

We know where its going, lets get there more quickly

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WHO ARE THE PATENT MONETIZERS?

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Have Patent, Will Travel?

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Advisory Services (Strategic) Who Can Help You License?

18

Advisory Services (Financial) Who Can Lend You Money?

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Who Might (Directly or Indirectly) Buy Your Patent?

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Who Can Help Sell Your Patent?

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HOW IS IT DONE?

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Offensive Acquisition
! Patent owner gets little to no up front cash ! Acquirer receives assignment or exclusive license in exchange for promise to pay X% of recoveries (typically a double digit % for $0 cash, or single digit % for 5-6 figures cash) ! Acquirer takes business risk financing cost of negotiation (including litigation). ! Summary:
! !

Patent owner places faith in acquirer. Acquirer takes legal/business risk.

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Exclusive Agency
! Patent owner receives no up front cash. ! Agent receives exclusive right to negotiate and make licensing decisions on behalf of patent owner ! Agent promises to pay a share (typically 50%) of proceeds to patent owner ! Agent takes business risk financing cost of negotiation (including litigation). ! Summary:
! ! !

Patent owner places faith in agent. Patent owner takes legal risk. Agent takes business risk.
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Advisory Services
! Patent owner receives no up front cash.* ! Advisor receives non-exclusive right to negotiate and propose licensing terms in exchange for a share (typically 25%). ! Advisor recommends legal counsel (at preferred rates, typically 15-25%) for any litigation required. ! Patent owner retains ownership and decision-making authority. ! Expenses may be financed by related funding source.* ! Summary:
! ! !

Advisor and patent owner must trust each other. Patent owner takes legal risk. Advisor/Patent owner share business risk.
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* Financing agent loans to patent owner in exchange for another 10-25% of future expected returns.

Brokers
! ICAP / Ocean Tomo:
! ! !

Conduct patent auctions Buyers include offensive acquirers as well as clients under the advise of the advisory services High risk due to all cash sale Too many to list them all Buyers include many of the same parties Unlike auctions, shared risk is possible

! Private brokers
! ! !

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Non-Traditional Licensing Business Models

! Invention Capital Investment
! ! ! !

Example: Intellectual Ventures Purpose: profit from long-term strategic investment Philosophy: invention as a functional discipline / infinite redneck theorem Result: too early to tell, but so far investors do not appear to have turned a profit

! IP Risk Management
! ! ! !

Example: RPX Corp. Purpose: profit from mitigated legal risk Philosophy: too many middlemen / retail is for suckers Result: accounting suggests positive cash flows, but doubts remain; RPX exploring more traditional business models

! Market-based Licensing
! ! ! !

Example: ICAP Patent Brokerage Purpose: profit from setting the retail market Philosophy: sell discounted licenses at a premium / lawyers make too much money Result: Large collection of CNSs auctioned in September; no results released
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INTELLECTUAL VENTURES

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Business Model
! Investment capital acquired from:
!

Incumbent technology companies:

! Adobe,

Apple, Cisco, Google, Microsoft Penn, Stanford, Texas

Universities:
! Minnesota,

Venture funds:
! Charles

River, Legacy Ventures, TIFF Private Equity

! Representative list full list available on:

! ! !

PatentlyO IAM Magazine Gametime IP

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IVs Success?
! Pre-Litigation Patent Spend & Licensing Success:
!

Spent: $1.2 B to acquire its first 30,000 patents ! $40,000 per patent Earned: $2B in licensing revenue for what is now a chest of 35,000 patents ! <$60,000 per patent * Divested assets began appearing in lawsuits at least as early as 2009

! First* lawsuits filed in December 2010

!

! Investor list made public pursuant to court order in May 2011 ! Recent Major Patent Offensive: IV v. AT&T et al.
! !

15 Patents, only 3 acquired from the same company (Conexant) Other IP contributors were Verizon, Motorola and Nokia

! An initial $28 M investment by University of Texas* was reportedly worth about $14 M in June 2011
!

IV collects a $1.25 M management fee annually from the university investment arm * The investor is University of Texas Investment Management Co.
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Too Aggressive?
! Litigation by investor Xilinx revealed:
!

IV used Xilinxs money to acquire a set of patents that Xilinx now needs to license.
! Read:

Xilinx Lawsuit Reveals More Of Intellectual Ventures Strategy

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RPX

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Business Model
! Utilize investment capital to acquire patents and patent rights (more on that later). ! Sell memberships to operating companies based on revenue. ! Members receive licenses to all RPX patents. ! Licenses vest after 2-3 years.
!

In other words, membership renewal driven by new patent acquisitions.

More detail here: http://gametimeip.com/2011/01/31/why-is-rpx-going-public-ask-willie-sutton/

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RPX Success
! Initial Public Offering valued the business over $1B ! Claims 100% membership renewal so far ! Showing positive cash-flows ! Business model reduces costs associated with litigation and negotiation

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Current Niche Buy The Milk, Not the Cow

! RPX acquires sub-license rights from patent owners.
!

In other words, they pay for the right to grant X number of non-exclusive licenses.

! Existing RPX members immediately licensed. ! Additional license rights used to sell memberships to new customers.
Read more here: http://gametimeip.com/2011/02/04/free-rides-acquisitions-and-sustainability-after-the-rpx-ipo/

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Does this sound familiar?

! Enforcer E causing trouble for victim V. ! Protector X sells victim V his security services. ! Enforcer E consistently leaves Xs customers alone.
Just as conspiracy theories suggested CIA involvement in domestic terror attacks as a pretense to securing post Cold War funding for the US intelligence community, RPX may also be motivated to periodically remind clients of the value of defensive aggregation by allowing its high profile clients to languish in litigation.
http://gametimeip.com/2011/03/09/rpx-ipo-patent-aggregation-terrorists-and-goldilocks/

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One Company Thought So

Read more here: http://gametimeip.com/2011/05/31/patent-aggregator-rpx-accused-of-extortion-racketeering-wire-fraud/

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RPX Appeal
! For Patent Owners:
! ! !

Single point of negotiation Quick sale of multiple licenses Let RPX do the legwork, you cash the checks

! For licensees:
! ! !

Bulk discount No per patent transaction fees Hopefully get lucky during membership period

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Value Proposition?
! Despite making their name in defensive aggregation, RPXs recent deal with Alcatel-Lucent sounds more like traditional licensing:
!

During a quarterly earnings call, Alcatel CEO said: ! So when we are working together with RPX, we discovered that the ability they have to do syndicate licensing, where basically, youre part of a club, you pay for the usage of it, but you dont own it because we own it, but you have the same protection as if you would buy it, is a very innovative new way of looking to a patent. This activity should be a strong pull for the 200+ prospective members that are currently in [RPXs] pipeline and that they are trying to sign up.

! An independent analyst suggested:

!

! In other words, this may succeed where their current product offering fails in providing a value proposition
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ICAP PATENT BROKERAGE CNS AUCTION

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Business Model

41

ICAP Live Auction Success

! Patent Owner: Round Rock Research, LLC ! Purchase price: $35M ! Buyer: Unknown, believed to be a PC or smartphone manufacturer ! Patent rights acquired: non-exclusive right to continue practicing 4000+ patents once owned by Micron
Read more here: http://gametimeip.com/2011/03/31/patent-litigation-experiences-k-t-event/

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ICAP Benefits Patent Owner

43

ICAP Benefits Licensee

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Retail vs Wholesale Comparison

Retail (ICAP): ! For Sellers
! !

Wholesale (RPX): ! For Sellers

! ! !

Discover the going rate Obtain single sale plus market data to support further negotiation Control over future marketability Pay no more than the next most willing buyer (Hopefully) get a better deal than competition Buy only what you need

Set a bulk rate Obtain multiple sales for single negotiation No control over subsequent buyers

! For Buyers
!

! For Buyers
!

! !

! !

Pay a predictable rate for many licenses Get a comparable deal based on market share Buy more than necessary
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The Future?
! How will ICAPs model scale?
!

After several months, ICAP has yet to release any official results

! How will patent reform affect industry-wide licensing efforts?

!

Litigation trends appear to be returning to normal pre-AIA levels

! Will either bundled (wholesale) or unbundled (retail) win out?

!

Of course, there could be a long market for both Will patent owners sell at market rates for fixed product quantity? Attempts have been made, but nothing successful yet.

! Will unbundled licensing be further abstracted?

!

! Will patent ownership be openly traded like stocks today?

!

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