Earlier this week word came from the Intellectual Property Exchange International Inc. (IPXI) that the U.S. Department of Justice Antitrust Division issued its Business Review Letter (BRL) upon the culmination of its eight-month review. The DOJ believes that the IP Exchange business model proposed by IPXI is capable of producing market efficiencies in the patent licensing arena and is likely to be pro-innovation. Although no permission is required of the DOJ before IPXI opens its exchange, having this review of the DOJ Antitrust Division complete has to make IPXI and Exchange participants much more at ease as the move closer toward their attempt to revolutionize IP licensing.
But who is IPXI and what are they trying to accomplish?
IPXI is the first financial exchange that facilitates non-exclusive licensing and trading of intellectual property rights with market-based pricing and standardized terms. 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.” Indeed, Marshall Phelps, an IPXI Board Member who is widely known as a pioneer in the field of IP licensing, including implementing groundbreaking initiatives for both Microsoft and IBM, says: “the new model that IPXI offers is a major breakthrough in the way that IP will be licensed on a non-exclusive basis.”
It sounds almost too good to be true I know, but when I looked at the IPXI model I reached the same conclusion as the DOJ. It is pro-patent and is likely to be pro-innovation, further fostering innovation, research and development.
My Earlier Review of IPXI
When IPXI first came across my radar screen I was a little concerned. See Will an Intellectual Property Licensing Exchange Work? They said that the acquisition of rights they would foster would eliminate the inefficiencies that consume traditional bilateral licensing efforts because IPXI would act as an intermediary between patent owners and potential licensees. Essentially, there would be rights exchanged on an open market. That is all good, but there seemed to be some buzz words that one might associate with the anti-patent community, such as referring to impediments within the transfer of rights being “artificial supply-side constraints.” The anti-patent community uses the phrase “artificial supply-side constraints” as code for “patent.” They think that patents themselves are “artificial supply-side constraints.” So my initial assessment was cautious.
Then I spoke with IPXI President and Chief Executive Officer Gerard Pannekoek, who filled me in on more of the details and it became clear to me that this new model was both exciting, but also pro-patent and pro-innovation. The constraints IPXI was talking about related to the reality that it takes time and money to negotiate any deal, and patent deals in particular. Smaller enterprises don’t have the luxury to afford to hire attorneys to negotiate licensing deals for small quantities, for example. Yet, there is a real opportunity for innovators to license rights non-exclusively in a commoditized way.
On June 17, 2012, in an article titled IP Exchange Brings Market Principles to Patent Rights Acquisition, I wrote:
The IPXI model seems very pro-innovation and very pro-patent. It just realizes that there are a lot of business externalities that work to prevent patent owners and licensees from closing deals. These externalities get in the way of new technologies being developed and businesses flourishing.
The “little guys” are disproportionately unable to accept the transaction costs associated with finding and ultimately doing deals. This means the small businesses and start-ups that are the backbone of the U.S. economy are disadvantaged. If IPXI can change the externality equation then we should see a significant shift of resources into the hands of those who are most likely to innovate; those same people who are most likely to also hire new employees. Now I understand why so many Universities are jumping on board…
No doubt that the goal of IPXI is ambitious. As Pannekoek told me, they are seeking nothing sort of “making IP a truly new asset class.” The model seems to be pro-patent, pro-innovation and pro-small business start-up, so I am all in favor of it and hope it is successful.
The DOJ Review
The aforementioned BRL was requested by IPXI, and while not required for IPXI to launch the Exchange thought it prudent in order to provide certainty to its members, market participants and prospects. The hope was that the BRL would confirm that the IPXI model provides efficiencies to the market and does not warrant enforcement action by the DOJ. The result of the BRL process was recognition that the IPXI business model seems pro-innovation and capable of creating market efficiencies.
Of course, spoken like a true bureaucracy, the DOJ couldn’t just come out and give IPXI its stamp of approval, but it did state: “IPXI’s proposed exchange potentially could generate efficiencies for the IP marketplace and encourage innovation through increased licensing efficiency, sublicense transferability, and greater transparency.” DOJ, however, declined to state whether it has any intention to bring antitrust enforcement proceedings in the future.
In regard to increased licensing efficiency, the letter also stated: “…IPXI has the potential to benefit both patent holders and users of technology with lower transaction costs and more efficient matching of licensors and licensees. The result may produce savings for downstream consumers.”
The BRL also went on to address the benefits to licensees price transparency in the IPXI model: “By increasing price transparency, licensees may be able to manage their IP budgets with more precision and make efficient research and development decisions that lower overall costs.” In addition, the letter indicated that if IPXI’s model can facilitate and advance licensing based on “F/RAND” or “fair, reasonable and nondiscriminatory terms”, “…it may generate significant efficiencies.”
The DOJ further noted certain potential benefits that IPXI can bring to the market when patents of more than one owner are offered together. The Department stated: “IPXI’s platform for pooled ULRs has the potential to generate additional efficiencies by reducing the time and expense of acquiring and disseminating all the pooled patents to potential licensees, reducing the amount of stacked royalties, clearing blocking positions, and integrating technologies that are necessary to practice an industry standard or field of use.”
IPXI President and Chief Executive Officer Gerard Pannekoek said: “We believe this letter from the Department of Justice confirms our long-standing view that IPXI is innovative and promotes efficiencies. With this review complete, we anticipate announcing very soon the official launch of the marketing period for our first offerings that will pave the way for trading on the Exchange.”
Despite the reluctance of DOJ to commit with respect to their future intentions, this development is unquestionably great news for IPXI. An acknowledgement from the DOJ that the business model is capable of producing market efficiencies and is pro-innovation has to mean that there are not envisioned antitrust issues since antitrust violations by definition create market inefficiency. Further, in recent years government concern in the high-tech sector has focused on what is believed to cause a drag on innovation. A pro-innovation, patent-friendly, market efficient business model should have no worry or concern relating to enforcement of antitrust laws.