Patent auctions: demonstrating value in patents alone
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This past July saw the largest patent auction held so far in US history. Nortel, a telecommunications equipment manufacturer, had more than 6,000 patents in its arsenal. Initially, it was thought that Google would be the top bidder. But the bidding price soon exceeded initial expectations and other participants had to combine resources.
Rival companies Apple, Microsoft and Research In Motion banded together, with three other companies, to submit the winning bid of $4.5 billion dollars. The motivation to join forces was twofold: to own the patents themselves and to keep them away from Google. The final offer was five times the opening bid and more than double what most people expected. While this patent auction was not the norm in terms of price or size, it reflected how valuable patents alone can be for patent holders.
With the scourge of patent trolls in recent years, patent holders are trying to avoid costly litigation and having courts determine how much their patents might be worth. Therefore new companies have developed strategies to help patent holders do this and to instead foster the buying, selling, brokering, licensing and auctioning off of their patents. In this way, the patent-holders would be compensated fairly for their ideas because the market value would be determined by the buyers, sellers, bidders, etc. and the buyers would have access to innovative ideas with minimal costs.
Patents are increasingly recognized as a separate asset in their own right such that if a patent holder does not ever create a specific product from the patent, the holder can still see a return by selling off the patents. Rational Patent Exchange (RPX), the company that was behind the Nortel auction, touts itself as a defensive patent aggregation service. According to John Amster, the CEO of RPX, their strategy is to buy up patents across a wide range of technology areas, including consumer electronics, mobile handsets, telecommunications, software, Internet, and e-commerce, and then charge companies for access to the intellectual property (IP).
RPX essentially grants technology companies licenses to IP, with companies paying an annual fee ranging from $40,000 to $5 million, depending on their size. RPX claims they are actually providing this service in opposition to patent trolls. RPX has been accused of being a non-practicing entity (NPE) as well, a term that has been used interchangeably with patent trolls.
According to Wikipedia, there is a slight distinction between the two. An NPE is "a patent owner who does not manufacture or use the patented invention, but rather than abandoning the right to exclude, an NPE seeks to enforce its right through the negotiation of licenses and litigation."
RPX distinguishes itself further because of how they derive value from the patents they own. Part of it comes from the service fee charged to the companies using RPX. The other part comes from providing a market-based approach rather than a litigation-based approach. This is reflected in their patent portfolio. Since it began in 2008, RPX has spent $260 million on about 1,500 patents. In other words, RPX does not spend enormous amounts on IP expecting to make back the cost through litigation settlements.
There is a question as to whether companies such as RPX enable other companies to pursue patents for a non-innovation minded purpose. For example, a group of companies can band together to buy up patents to block a troublesome competitor. Or a patent holder can charge one competitor far more than it does others, intending to put it out of business. To acknowledge patents are a valuable asset to a business does mean that a patent can be used as a strategic pawn to get ahead in a sector too.
Companies like RPX have to keep the best interests of their clients in mind, and it seems that most of their clients are corporations whose ultimate goal is to profit from their IP portfolio. The more important focus here is that at one time, patents were seen as valuable only if they amounted to a tangible invention. Now, with the help of patent auctions, NPEs, and companies such as RPX, patent holders can be fairly compensated for their patents and it can be done in such a way to avoid costly, timely litigation with those pesky patent trolls.