Patent Mass Aggregators: The Giants Among Us
|Written by Tom Ewing, Avancept LLC
Professor Robin Feldman, U.C. Hastings College of Law
Posted: February 6, 2012 @ 6:43 pm
The patent world is quietly undergoing a change of seismic proportions. In a few short years, a handful of entities have amassed vast treasuries of patents on an unprecedented scale. To give some sense of the magnitude of this change, our research shows that in a little more than five years, the most massive of these has accumulated 30,000-60,000 patents worldwide, which would make it the 5th largest patent portfolio of any domestic US company and the 15th largest of any company in the world.
Although size is important in understanding the nature of the shift, size alone is not the issue. It is also the method of organization and the types of activities that are causing a paradigm shift in the world of patents and innovation.
These entities, which we call mass aggregators, do not engage in the manufacturing of products nor do they conduct much research. Rather, they pursue other goals of interest to their founders and investors. Non-practicing entities have been around the patent world for some time, and in the past, they have fallen into two broad categories. The first category includes universities and research laboratories, which tend to have scholars engaged in basic research and license out inventions rather than manufacturing products on their own. The second category includes individuals or small groups who purchase patents to assert them against existing, successful products. Those in the second category have been described colloquially as “trolls,” which appears to be a reference to the children’s tale of the three billy goats who must pay a toll to the troll waiting under the bridge if they wish to pass. Troll activity is generally reviled by operating companies as falling somewhere between extortion and a drag on innovation. In particular, many believe that patent trolls often extract a disproportionate return, far beyond the value that their patented invention adds to the commercial product, if it adds at all.
The new mass aggregator, however, is an entirely different beast. To begin with, funding sources for mass aggregators include some very successful and respectable organizations, including manufacturing companies such as Apple, eBay, Google, Intel, Microsoft, Nokia, and Sony, as well as academic institutions such as the University of Pennsylvania and Notre Dame, and other entities such as the World Bank and the William and Flora Hewlett Foundation. Nations such as China, France, South Korea, and Taiwan even have their own mass aggregators to varying degrees.
Moreover, the acquisition appetites and patent supply sources are quite interesting. Mass aggregators may have portfolios that range across vastly different areas of innovation from computers to telecommunications to biomedicine to nanotechnology. In some of the acquisition activity, mass aggregators purchase large chunks, and even the majority, of an operating company’s patents and patent applications. They typically pay cash up front, as well as a share of any future profits generated from asserting the patents against anyone other than the selling manufacturer. Mass aggregators have engaged in other unusual acquisition approaches as well, including purportedly purchasing the rights to all future inventions by researchers at universities in developing countries. Other acquisition approaches purportedly include targeted purchases of patents that are of particular interest to the mass aggregators’ investors.
The types of returns promised to investors and the types of benefits offered to participants are also quite different from garden-variety non-practicing entities, as are some of the tactics used in organizing the entities and in asserting the patents. Finally, the scale itself is simply mind-boggling. Mass aggregators operate on a scale and at a level of sophistication and complexity that would have been unimaginable a decade ago. They have taken the prototype strategies pioneered by a prior generation of non-practicing entities and changed them into some of the cleverest strategies yet seen in the intellectual property rights field.
One of these clever aggregators is Intellectual Ventures. The scope of Intellectual Ventures’ activities is so vast that it is difficult to contemplate the reach of the company. It has invested in innovations and technologies across a broad spectrum of industries—everything from computer hardware to biomedicine to consumer electronics to nanotechnology. In more than 1,000 transactions, by our count, the company has acquired inventions and related intellectual property from individual inventors, corporations of all sizes, governments, research laboratories, and universities.
Getting a handle on the scope and activities of an entity as secretive as Intellectual Ventures is not easy. The structure of the Intellectual Ventures network of operations makes it tremendously difficult to detect and trace the company’s activities. Although Intellectual Ventures has never divulged the precise nature and extent of its portfolio, the company reported in June 2011 that it holds some 35,000 “invention assets.”
Intellectual Ventures’ success in raising capital has led to the creation of a number of smaller versions of the company. For example, Acacia Research Corporation is the largest publicly traded patent-licensing company, and has executed more than 1,000 license agreements across 104 of technology licensing programs. Another similar company, RPX, has spent over $300 million acquiring patents and controls them via several funds, such as RPX-LV Acquisition LLC and RPX-NW Acquisition LLC. However, while RPX licenses or buys patents for its current members, it does not always retain rights to these patents and acknowledges that the patents could later be used by other potentially litigious owners to bring suits against companies that were not members of RPX at the time in which it engaged in those licenses.
The patent world is poised to undergo a change of astounding proportions. A system that has operated such that the vast majority of patents bring little or no return is shifting to a system in which a substantial number of patents will become traded and monetized, largely through a system of mass aggregators. The giants among us are undoubtedly changing the patent world. The question that remains is how.
One could argue that mass aggregators could potentially have positive effects. Mass aggregators might potentially ensure that the forgotten inventor receives the compensation due or could serve as a middleman to connect inventors with capital and expertise. Mass aggregators could also serve as litigation defense funds, providing Just-in-Time patenting and creating a powerful weapon stream that will deter troublesome infringement suits. Mass aggregators may also reduce troll activity by soaking up the supply of monetizable patents. The question, however, is whether the cure is worse than the disease.
In particular, the same market characteristics that have led to the rise of troll activity are likely to plague the activities of mass aggregators as well. Without changing the basic incentive structures of the patent system, mass aggregation will be no better than the current patent system at rewarding the deserving inventor and greasing the wheels of innovation while protecting diligent producing companies. Moreover, the activity of mass aggregation brings its own potential harms. Rather than contributing technological innovations, mass aggregators operate as a tax on current production, burdening existing products and potentially reducing future innovation and productivity. In addition, characteristics of the market for patent monetization make it an excellent vehicle for anticompetitive behavior, including horizontal collusion and single firm or multi-firm behavior that raises rivals’ costs. Most important, the basic business model of mass aggregation is troubling. The successful aggregator is likely to be the one that frightens the greatest number of companies in the most terrifying way. This may not be an activity that society wants to encourage.
These and other concerns suggest that mass aggregators and the market for patent monetization should not be allowed to flourish unchecked. The burgeoning market must be properly monitored, regulated, and restricted so that the considerable risks associated with this activity may be fully contemplated and cabined.
For more in depth treatment of this topic please see our recently published law review article The Giants Among Us, 012 Stan. Tech. L. Rev. 1 (January 2012).
About the Authors
Tom Ewing, principal consultant at Avancept LLC, is a commercial lawyer and intellectual property counselor. IAM Magazine has thrice named Mr. Ewing as one of the world’s 250 best intellectual property strategists. Mr. Ewing received his juris doctorate from the University of California, Hastings College of the Law. He also holds graduate degrees in literature, engineering, and industrial management & economics (expected 2012). Mr. Ewing is a member of two state bar associations, and has been a registered patent agent/attorney since 1990.
Robin Feldman is a Professor of Law at U.C. Hastings, Director of the UC Hastings LAB Project, and has served as the Chair of the Antitrust Section of the American Association of Law Schools. Professor Feldman’s first book, The Role of Science in Law, was published by Oxford University Press in 2009. Her second book, Rethinking Patent Law, is forthcoming in 2012 from Harvard University Press. Professor Feldman received a bachelor's degree from Stanford University graduating Phi Beta Kappa, and a J.D. from Stanford Law School, graduating the Order of the Coif and receiving the Urban A. Sontheimer Award for graduating second in the class.