Every technology company I have is getting hit by patent lawsuits that are the biggest bunch of bullshit ever.
I’m talking about companies that have been doing business the same way for years that are getting hit by patent trolls . These aren’t operating companies that are trying to protect their business. These are companies that aggregate patents and raise capital for the sole purpose of suing companies and extorting money from them.
— Mark Cuban on August 6, 2011 (If you want to see more jobs created – change patent laws)
Well on April 13, 2012, Mark Cuban became the owner of a technology company (Vringo) that actually owns patents originally obtained by Internet pioneer Lycos, and purchased with capital raised for the sole purpose of licensing those patents to today’s Internet giants (i.e. Google). The news comes almost one month after Vringo announced a definitive merger with Innovate/Protect, the parent company of I/P Engine that acquired the Lycos patents in June 2011.
By September, I/P Engine had filed a lawsuit in the nation’s “rocket docket,” the Eastern District of Virginia, against Google, AOL, IAC (owner of Ask.com and Match.com), Gannet (publisher of the USA Today) and Target (seriously). Of course, IAC once thought ordinary people would relate to owning a butler, AOL auctioned off most of its patents, and companies like Gannet and Target got roped in thanks to their use of AdSense, most of I/P Engine’s energy is obviously focused on Google. For example, the orchestrators of the Vringo merger push Google’s use of the former Lycos advertising technology as part of the value proposition for the deal. (See page 12, slide 11, of the Investor Presentation, full presentation in PDF available for download here.) As a further clue that Wall Street believes in, though largely misunderstands, the value of patent rights, the merger announce lauds I/P’s patent litigation as an asset, referring to the suit as the company’s “flagship litigation.” (For views on why this assessment misses the mark, see the post Are Patent Assertion Companies In Business To Litigate?)
Innovate/Protect was formed on June 8, 2011, about three weeks before formally acquiring the patents from Lycos. Originally, the company was named Labrador Search Corporation, and it created Smart Search Labs, Inc. on June 14 (about a week prior to the closing the Lycos acquisition). Labrador became Innovate/Protect on September 6th, and Smart Search became I/P Engine on September 9th, about a week prior to the lawsuit. Lycos reportedly sold the patents for $3.2 M, paid for by Innovate/Protect with a promissory note from Hudson Bay Master Fund, part of a billion dollar hedge fund. Since then, Innovate/Protect sold $7 M worth of common and preferred stock, and has burned through almost $3 M in expenses. Including $2 M for legal expenses, which likely includes attorney’s fees for Dickstein Shapiro (I/P Engine’s litigation counsel), and compensation.
Possible motivator’s for Innovate/Protect’s decision to seek a merger partner include the conditions placed on the Hudson Bay note. According to the financial statements, as of the end of 2011, “Hudson Bay owned all of the outstanding preferred stock of the Company, convertible upon demand to common stock sufficient to control the Company.” On March 22, just a week after the announcement of the Vringo merger, Hudson Bay became entitled to require Innovate/Protect to redeem $2 M worth of principal on the original note. Innovate/Protect produces no revenue, so repayment of the note will require it to either further dip into its cash reserves, or find a source of revenue (i.e. Vringo).
Cuban’s purchase of 7.4% of Vringo makes him the company’s largest shareholder. Meanwhile, the second largest shareholder, Iroquois Capital, applauded the Innovate/Protect merger, stating that “this lawsuit [against Google] and the IP play” would “tak[e] this company to another level.” However, when the deal closes, Innovate/Protect, not Vringo, controls its own destiny by owning more than 55% of the company. Nowhere does this manifest more explicitly than the new executive structure of Vringo. Innovate/Protect investor Donald Stout, also the co-inventor and founder of NTP joins Vringo’s board as chair of its Intellectual Property Committee. Andrew Lang, co-inventor Andrew Lang of the patents in the I/P Engine v AOL lawsuit becomes the company’s new CTO. The new COO, Alexander Berger, is a former VP at Hudson Bay (the company that originally financed Innovate/Protect).
In the aforementioned blog post from August, Cuban lamented the nation’s patent system, saying “patent law is killing job creation.” Today, however, he uniquely finds himself positioned to generate huge returns by investing in a company with potential patent licensing revenue as its principal asset. Should that investment pan out, the amount of jobs Cuban creates as a result could very well disprove his own statement.
On the other hand–like so many other who complain about mythical patent creatures on the one hand, while generating patent licensing income with the other(looking at you, HP)–Cuban will probably just tell us that his patents are more deserving and important than your patents.