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IP, IP Asset, Patent

Digitude Patent Monetization Effort Bombs – RPX Picks Up The Carcass

RPX announced “its largest syndicated transaction to date with the participation of more than 10 RPX clients.”  According to the release, “RPX will invest approximately $46 million of its own capital in the transaction” resulting in the transfer of 500 patents and “sub-license rights” currently owned by Digitude and Digitude subsidiary Preservation Technologies, companies originally funded by Altitude Capital Partners in 2011. The patent aggregator claims the acquisition “will serve to significantly increase RPX’s portfolio of patent assets and remove the potential exposure Altitude Capital Partners (ACP) and its management arm, Altitude Capital Management LLC (ACM), present to RPX clients.”

Both Digitude and Preservation actively sought to license their portfolios. Preservation filed lawsuits in December 2011 against Google, Facebook, Netflix and several other companies, over patents originally owned by the Holocaust history preservation organization, the Shoah Foundation.  Digitude likewise filed a series of lawsuits in December against smart phone makers, including Sony, Nokia, Samsung, RIM, HTC and LG, and a January ITC complaint filed by Digitude targeted many of the same companies.  Digitude’s lawsuit involved patents acquired from Apple and Adaptec, which began selling its assets in 2011.

Digitude burst onto the IP Monetization front in March 2011, boasting $50 MM in funding from ACP and claiming that inventors could contribute their IP to Digitude in exchange for an undisclosed equity interest.  By June, Digitude had already acquired its stash of 500 patents (the majority of which are still titled in the names of holding companies Hupper Island and Cliff Island) and told Forbes it had already completed a licensing deal with one company–unnamed at the time, but likely Apple. Their largest contributors appear to be Adaptec, Apple and the “red-headed stepchildren” of Eaton Corporation–patents previously bounced from Eaton to NISTAC, a tech-transfer arm of Kansas State University, and then to holding company Madison Island, which shares the same Madison Avenue address as Digitude and parent ACP, where they sat for more than 5 years before the transfer to Digitude’s Cliff Island.

Of course, if ACP sold out the bulk of Digitude’s holdings for less than it’s original $50 MM investment, an inventor payout is extremely unlikely.  Digitude did not respond to a Gametime IP inquiry regarding whether any inventors received an equity interest, or would receive a portion of RPX’s $46 MM payment, but did issue a statement in June 2011 that a patent owner contributed IP in exchange for shares and “expects to realize substantially higher risk adjusted returns on their investments.”

ACP reportedly generated more than $700 million in licensing revenue from 2005 to date, with no clear indication whether the current $46 MM payment is included in that figure.  However, by selling out the portfolio barely 4 months into the litigation phase of its licensing campaign, ACP signals that Digitude’s effort effectively bombed.  Leaving aside the Preservation Technologies case–which, with its own set of peculiar facts, is a story all to itself–Digitude managed to assert only 4 out of the more than 500 patents in its possession (less than 0.8%).  Further, with the successful intervention by Google into the ITC action, Digitude was likely to continue facing serious opposition.  Finally, consider that the announced deal with RPX also includes “restrictive covenants from Robert Kramer, the founder of [Altitude Capital], to prevent Mr. Kramer from licensing patents against the RPX client network for an extended period of time.”

In a comment to Gametime IP, a well-know industry participant said, “This is a curious transaction.  Depending on the scope, it would appear that someone is heading into retirement.”  Other sources similarly suggested quiet speculation that Kramer wanted an opportunity to retire from IP monetization altogether, and the RPX payout may afford him the opportunity  to do just that.

Basically, faced with a largely worthless portfolio, and an uphill battle with hard-nosed opponents like Google, Digitude and ACP jumped at the opportunity to sell out and gracefully exit, rather than de-capitalize and find a warm body willing to absorb the punches.  RPX’s announcement curiously announces that the Digitude purchase as a 10-participant syndicated acquisition, generally meaning the purchase is only for the benefit of the syndicate participants, but with a $46 MM contribution of RPX’s own funds–nearly 50% of the cash listed on RPX’s most recent balance sheet.  If the 10 participants contributed the remaining $4 MM–giving Kramer back is original $50 MM investment–it would cost them only $400,000 each, well below the cost of litigating Digitude out of existence.  Of course, the participant contribution could have been higher while still representing a benefit to the contributors, leaving open the possibility of an even higher payday for Kramer and ACP.

Meanwhile, what does this transaction mean for RPX, it’s shareholders and future client prospects?

The 500 patents acquired by RPX are, as their history and Digitude’s own actions demonstrate, likely to be largely worthless and not likely to lead to any additional revenue.  However, there could be future membership opportunities as a result of the Preservation sub-license acquisitions and the restrictive covenant.

RPX’s sub-license acquisitions from Preservation Technologies enable RPX to license its member companies while avoiding giving “free riding” non-members the benefit of their involvement (without paying RPX’s membership fees, of course).  RPX CEO John Amester previously explained how the sub-license purchase enabled the company to avoid benefiting “piggy-backers.”  In a hypothetical example where 10 companies involved in litigation over a patent, where only five are RPX members, Amster explained, “We might well buy a sub-licence to the technology for our members and leave the other five to their own devices.” (See Free Rides, Acquisitions And Sustainability After The RPX IPO and No free ride in battle against patent trolls, says RPX co-founder).

Thus, it’s no surprise that RPX’s announcement goes out of its way to mention how the aggregator “will obtain certain license options for future RPX clients, including seven companies who remain in litigation against Preservation.”  In other words, RPX maintains leverage over the remaining defendants in the Preservation cases to sell additional memberships.

In addition to patents and patent rights, RPX also received, for the benefit of its client network, “restrictive covenants” from Altitude Capital founder Robert Kramer “to prevent Mr. Kramer from licensing patents against the RPX client network for an extended period of time.”  Although RPX specifically declined Gametime IP’s invitation to comment or elaborate for on length of time Kramer remains bound by the covenants, Amster boasted about the value the transaction brings to RPX clients, saying:

This innovative transaction demonstrates that we are executing our vision for a more rational marketplace where prolonged litigation is not required for a fair exchange of patent value. Our approach to negotiating long-term, restrictive covenants ensures that our investment is not recycled to create more patent litigation and expense for our client network.

Of course, the actual term of the restrictive covenant is highly pertinent to understanding the value RPX actually provides with its purchase.  Considering the memberships purchased by RPX clients must be renewed (usually every 2 or 3 years) in order to maintain the benefit of new acquisitions, expiration of the restrictive covenant might actually be timed to further encourage membership renewal.  If RPX negotiated an extremely long-term peace accord with Kramer that keeps him out of the patent licensing space entirely, say something on the order of 10-20 years or more, then RPX’s retirement present benefits future generations of operating companies without really adding value to their bottom line.  Thenagain, Amster hates free-riders, so the agreement with Kramer could be a shorter term deal, and one that RPX would only have the resources to renew if, wink-wink, some more renewal payments come through the door.

The value of RPX’s transaction to investors depends largely on the scope and terms of Pax Kramerica, and, so far, the company isn’t talking.

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Discussion

4 thoughts on “Digitude Patent Monetization Effort Bombs – RPX Picks Up The Carcass

  1. Quick question: How much of Digitude’s $50MM fund was allocated to the purchase of its interest in the 500 patents that were the subject of this week’s transaction with RPX? Seems to me that one would need to know this in order to calculate D’s cash-on-cash return for this particular investment. Could be higher than 1x (the figure suggested by your post) if D invested an amount less than the full amount of its fund to acquire rights in the involved patents.

    Posted by Jorge M. Torres (@jorgemtorres) | April 7, 2012, 10:37 am
    • That information has not been made public, largely to avoid allowing outsiders from making those assessments.

      My rough assessment is based on my own intuition and experience dealing with situations like these, and conversations with other monetization experts.

      As far as the allocation, I can tell you that a large chunk of Digitude’s patents appeared to be untapped portfolios owned by ACP holding companies well prior to Digitude’s formation. A large capital investment to acquire a 500 patent portfolio was likely unnecessary. Thus, the only reason for a private company to make such a specific announcement on the capital investment X is to set the expectation for the size of recovery at some multiple of X.

      Posted by Patrick | April 7, 2012, 10:53 am

Trackbacks/Pingbacks

  1. Pingback: Spring Cleaning Time At Patent Monetization Firms « Gametime IP - May 1, 2012

  2. Pingback: The Intellectual Ventures / Nvidia Patent Partnership « Gametime IP - May 16, 2012

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