Will an Intellectual Property Licensing Exchange Work?

The Intellectual Property Exchange International Inc. (IPXI) announced last week that its membership had grown to 27 organizations. IPXI is a a financial exchange that facilitates non-exclusive licensing and trading of intellectual property rights with market-based pricing and standardized terms.  The 21 new members that have joined IPXI since December 2011 include leading innovative companies with significant IP assets representing a variety of technology markets, university research institutions ranking in the top 20 in the world, and top U.S. national laboratories. See list of exchange members. But will this new model for licensing intellectual property rights prove to be any more useful than existing models?

“The inefficiencies in traditional bi-lateral licensing are not exclusive to any one industry or type of IP owner. These companies are coming together for the first time to develop a new paradigm and Rulebook that we believe will have a tremendous positive impact on our world. Rather than resorting to costly litigation, companies, laboratories and universities can use the Exchange to harness the power of an idea, monetize it fairly and spur greater innovation,” explained Gerard J. Pannekoek, President and CEO of IPXI.

Earlier this month The Economist ran a short article explaining that IPXI’s new financial exchange hopes to make it easier to trade patent rights.  At its core is what IPXI calls a “Unit License Right” or ULR. According to IPXI, “ULR contracts transform private licensing of technology into consumable and tradable products, allowing for improved market transparency, smooth technology transfers, and increased efficiencies.”

The Economist article explains:

A ULR grants a one-time right to use a particular technology in a single product: a new type of airbag sensor in a car, say.  If a company wants to use the technology in 100,000 cars, it buys 100,000 ULRs at the market price.  ULRs are also expected to be traded on secondary markets.

This is simpler, faster and cheaper than the lawyer intensive process of negotiating bilateral licenses for intellectual property, the high cost of which discriminates against small companies, leaves patents unused on the shelf and hampers innovation.

IPXI claims that the ULR contracts will eliminate the inefficiencies that consume traditional bilateral licensing efforts because IPXI acts as an intermediary between patent owners and potential licensees, with rights being exchanged on an open market.  Given that IPXI by its own admission only deal with non-exclusive licenses I have to wonder how many patent owners are going to like the idea of a non-exclusive license being transferable in whole or in part.  This would seem to create a bit of a nightmare for tracking authorized uses.  It would also seem likely to lead to potentially expensive litigation with complicating issues.

I can just envision the cases where one party acquires the rights to a particular technology in those 100,000 cars and having exhausted the right themselves then transfers the right to another party who now believes they have the right to utilize the technology in 100,000 cars.  For this system to have any hope of working for the patentee it would have to have a rather complicated tracking and verification mechanism, otherwise that initial acquisition of the right to use the technology for 100,000 units could morph into an indeterminate number of uses.  Isn’t this the exact problem that the entertainment industry dealt with, and continually deals with, as the result of digitized music and movies, for example?  Why would patent owners ever want to have those headaches for themselves?

In any event, back to the Unit License Rights.  According to IPXI, “Each ULR contract purchased gives the buyer the right to use a pre-established unit of IP, for example the right to make and/or sell up to an established quantity of products covered by the patents in question.” The IPXI website goes on to say: “The ULR contract market mechanics are designed to permit the market to guide ULR contract prices to the long-term fair value of the underlying technology rights to the ultimate consumer of the rights while simultaneously preventing artificial supply-side constraints.”

Preventing artificial supply-side constraints? Now my spidey-senses are activated.  That sure has a familiar ring to it, doesn’t it?  I am skeptical about the desire to eliminate market inefficiencies when combined with simultaneous attempts to drive down royalty payments, thereby compensating innovators only for some perceived benefit to the ultimate consumer.  The goal of the first, to reduce inefficiencies in a bilateral licensing negotiation is laudable, but minimizing the “artificial supply side constraints” based on the market as viewed by the ultimate consumer is a recipe for undervaluing innovative value-adds.  And let’s not forget that some (perhaps many) of these value-adds mean the difference between having desirable functionality or not, and having a viable product or not.

Allowing the market to guide licensing royalties based on what the ultimate consumer receives sounds like a familiar cry of those in the high-tech sector who would seem to prefer no patent system at all.  The use of this language causes me to want to try and read between the lines.  When I do I am left wondering how IPXI is going to create a uniform licensing regime that will grant the right to make and use a certain product.  It is the language dealing with the paying of  a licensing royalty (or contract price) that is commensurate with the benefit received from the ultimate consumer that has me skeptical and concerned. Yes, this would reduce those nasty supply-side constraints, which seem to be code for eliminating a perceived excess paid to a patentee over and above what IPXI deems reasonable given the technology to be implemented and the benefit of that technology to the consumer over some baseline.

Excuse me for noticing that this seems on its face to be a pipe-dream, at least the way it is being presented. The goal of these ULR contracts seems to be to grant the right to make and use a certain product so that there supply side constraints are minimized. But how is that possible unless IPXI signs up every patent holder as a member? Without obtaining the rights to license each and every patent that relates to a certain product the licensee would never be able to know for sure that they have the right to make and use a certain product having made a basic contract payment.

Many products today combine numerous patented technologies. In certain high-tech gadgets it is not uncommon for hundreds of patented technologies to be utilized in the design and implementation. This is why many of the giants of Silicon Valley have increasingly been fighting a war on the patent system. Simply stated, those that make and market high-tech gadgets do not want strong patents. They would prefer few patents and patents that are weaker, or at the least patents that don’t cost so much to infringe. This is why there has been a concerted effort in Congress and at the Supreme Court to erode patent rights, making them less valuable, easier to infringe and weak to the point where a victorious patentee in a patent litigation is not entitled to an injunction against further infringement as a matter of right. For crying out loud the patent right already grants the patentee the right to exclude others from making, using and selling. The only rights a patent conveys are exclusionary. So the fact that a victorious patentee is not entitled to have a district court retain jurisdiction to enforce the patent via contempt proceedings against an adjudicated infringer (i.e., tortfeasor) is ridiculous.

The Silicon Valley elite are fighting constantly to minimize the cost of producing and distributing high-tech gadgets, and the way that they seek to do this is to reduce the cost of the patent licenses required. In some instances rather than reducing the cost of the patent licenses they simply ignore patent rights and infringe, trampling on inventors and small business altogether. This effort by IPXI seems to me to be yet another attempt to push down the value of the technological innovations that embody various high-tech gadgets. But those “artificial supply-side constraints” are innovations that took time and money to come up with and protect. It is insulting to refer to these as “artificial.” The use of such a pejorative term for innovation is an attempt to control the linguistic high ground at the expense of innovation and the U.S. economy, which is overwhelmingly based on intangible assets in the form of intellectual property.

Whatever the merits may or may not be with respect to a strategy to minimize the value of patent rights, I just don’t see any way that something like this can be successful. The fact that there is an attempt to do this seems to fundamentally misunderstand the role of patents and the patent system.

Even if IPXI acquired all existing rights to make, sell and distribute a particular high-tech gadget, there is always the possibility that someone else in the future would acquire blocking patents that would prevent the product from evolving to include after developed technologies. If those who hold those after developed technologies were not willing to enter into the IPXI pool then anyone who built products inclusive of after developed technologies would be infringing and incurring those nasty “artificial supply-side constraints” that seem to be at the heart of what the ULR is trying to prevent or at least minimize.

Furthermore, does anyone believe that it is possible for IPXI to acquire all of the rights to high-tech gadgets with the promise of minimizing value of those patents so that the end consumer winds up with the ultimate financial benefit? Who is Corporate America would buy into such a proposition? Perhaps more than you would think, because it seems that the focus is not on the ultimate consumer at all, but rather on minimizing the cost to the manufacturers and distributors. If they can go and charge whatever they want then the ultimate consumer would not reap any benefits. The benefits would be reaped by those who drove down the cost of obtaining the patent licenses necessary to make and selling the product. Furthermore, thinking that there could be any agreement among those obtaining the rights to keep prices low seems foolish if you ask me. Price fixing, whether at a high rate or even at a low rate, raises significant Antitrust concerns.

So what does this all mean?  As with any new service offering it will take time to unfold.  For now we just wait and watch to see what happens, noticing that the articulated goals may be at odds and the language used harkens back to the anti-patent movement that seeks to minimize the value of patents in general.