In early August, the cross-blockchain protocol developer Peer Mountain announced that it had joined the License On Transfer (LOT) Network, an organization founded in 2014 through collaboration between Internet giant Google, multinational electronics firm Canon and open source provider Red Hat. LOT Network markets itself as a non-profit consortium, which offers its members a legal mechanism affording them protection from patent assertion entities (PAEs) and immunizes its members against patent suits from non-operating entities for about 1.2 million worldwide patent assets currently owned by LOT members.
Ken Seddon, the CEO and president of LOT Network, told IPWatchdog that members sign the exact same 10-page agreement, which attaches a non-exclusive conditional license to that company’s patents. This license protects other members in the event that one of the patents to which the license is attached ever becomes owned by a patent assertion entity (PAE), thereby preventing the PAE from asserting the patent against LOT Network members.
“Think of it as a fuse attached to a patent,” Seddon said. “While the patent is owned by an operating company, all the traditional uses of patents are fair play. It’s a live patent that can be asserted against anyone inside or outside of the network. But, if it ever falls into the hands of a PAE down the road, then the fuse blows and the patent becomes disabled against other companies which were members of LOT at the same time that the patent was in the Network.”
The LOT Network conditional license only applies to patents that are in network at the time that a firm joins the consortium. If a business joins LOT after a LOT member sells a patent, previous LOT members are protected by the conditional license whereas the new member still faces the potential of an infringement suit down the road on that patent.
According to Seddon, LOT Network was created as an industry solution to the issue that some companies were having with patent lawsuits from PAEs. “From 2002 to 2011, U.S. patents were extremely strong. Reform from both legislation and the courts has created much uncertainty in the patent system, impacting the value of patents today. The irony of the PAE issue is that companies only have themselves to blame. Eighty percent of the patents used by PAEs came from operating companies. Instead of relying on Congress or the Supreme Court to solve this problem, LOT member companies are taking responsibility for solving this issue.”
Of LOT Network’s more than 275 members, one-third of the network’s membership consists of startups who make less than $25 million in annual revenue. Given the encumbrance that membership in LOT places upon the patents of network members, it would seem a little strange that so many startups have elected to join the consortium as the conditional license effectively forecloses upon options that a startup would have to sell their patents to a PAE if they exit the market.
“The number one reason not to join LOT is because a company values selling to PAEs more than it values optimizing for success through risk reduction,” Seddon said. “Basically, to find out whether LOT is right for your company, it comes down to whether you’re optimistic about your future.” He was also quick to point out that, over the past year, all of the publicly traded companies who are members of LOT outperformed the S&P 500 by 90 percent, although it’s not likely that many of those publicly traded companies are startups.
Seddon argued that the patent encumbrance that comes with LOT membership has a de minimis negative impact on the patent’s value, pointing out the declining street value for patent sales in recent years. He points out that the average price per patent paid by risk management services provider RPX Corporation was $43,000 in 2015, down from a high of $201,000 per patent on average paid by RPX in 2012. Normally, companies don’t seek to take on an encumbrance on their patents. Since no one has ever left LOT, Seddon suggests that members believe they are receiving more value than they are giving up.
The definitions of certain types of firms in the patent world tend to shift depending on who uses them but the LOT Agreement defines a PAE as any firm that earns 50 percent or more of its annual gross revenue from damages awarded through patent litigation. However, LOT Network doesn’t count damages earned by an operating company suing a competitor offering an infringing product.
“We believe in the normal and traditional use of patents,” Seddon said, adding, “that just because a company is a member of LOT, doesn’t mean that they can’t bring an infringement suit against another LOT member.” He noted that the consortium includes members who have recently been adverse in litigation, such as Waymo and Uber or Cisco and Arista. “Let’s say that you’re an autonomous vehicle startup and you file a patent infringement suit against one of the big OEMs,” he said. “Whatever the startup receives in litigation doesn’t get counted as assertion revenue towards classification as a PAE. As a startup, you can go after your competitors if they take your invention.”
LOT Network’s use of the term “patent troll” is likely to rankle many readers given the derogatory nature of that term and the fact that even the Obama-era Federal Trade Commission determined that term to be overly prejudicial. Asked why LOT uses the term, Seddon said that the organization understands the pejorative nature of the term, but it also recognizes that most startups coming to the website are able to connect with that term over PAEs. “We don’t mean to judge in any way what is good behavior and bad behavior,” Seddon said. “What we want as a community is a strong patent system that rewards investments, rewards capital and has certainty.” According to Seddon, the 10-page agreement signed by LOT members does not include the term “patent troll,” although the term is widely used in the organization’s promotional materials.
LOT Network is currently incentivizing startups to join the organization through a patent donation program which offers three patents free to newly joining members with another two patents available through referrals. Seddon added that the organization is also currently looking at developing a program that will benefit universities which have shown an interest in joining LOT. “We want to figure out the most authentic and sincere way to help universities,” Seddon said. He noted that LOT has never considered universities to be patent trolls given that those entities are likely to generate far more revenue from tuition and sponsored research than they’d ever earn from litigating their patents in court.