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Growth of the Patent Monetization Market

Exactly how mature is the “patent monetization” market?  Erich Spangenberg predicted during an interview with Good magazine’s Heather Skyler that “[p]atents will trade as a commodity in the next five to six years.” Jackie Hutter, meanwhile, similarly acknowledges that “patent monetization is the wave of the future” in a recent post at her IP Asset Maximizer blog.  In fact, she accurately observes that “a limited market for patents has grown up where patent brokers serve as intermediaries for patent owners who wish to sell patents on behalf of their owners.”  ICAP Ocean Tomo, IP Investments Group, and IPotential are but a few companies who loosely fit this description.

How large is the market today?  Some insight is provided via a survey recent conducted by noted blogger and patent attorney Gene Quinn.  This survey, designed to determine the most popular patent blogs (with the venerable Patently-O taking top honors) yielded slightly more than 3000 votes.  Making the assumption there is some correlation between the number of votes cast and the size of the relevant IP market–also looking at total number of registered agents, lawyers claiming patent expertise, searches for terms such as “patent sale,” “patent broker,” and “patent market”–you get a better sense of how many participants there are in the market today.  That the market for exchanging patents is limited is hardly a controversial notion.  The more interesting question is why.  Hutter’s post suggests that the reason is age:

People believe this existing patent monetization market is “normal” because it is the prevailing model in existence today.  However, with a few exceptions, the establish marketplace for patents has existed for less than about 15 years.  (In fact, as a young litigation attorney, I represented one of the first NPE’s–AudioFax–in 1997.) As with any nascent business model, the patent monetization market has a lot of growing up to do.  Put simply, the existing marketplace is far from “normal.”

However, the true age of the patent market might be ten times Hutter’s estimate.  Adam Mossoff (a scholar that I’ve now cited twice in as many weeks—just proving that practitioner can learn from academics) thoroughly discussed a case study from the 1850’s involving inventor Elias Howe’s battles with the sewing machine industry.  Howe’s 1846 patent claimed the combination of elements that were critical to the Singer sewing machine that became much popularized in the 1850’s.  (The Incremental Invention of the Sewing Machine (Part 2 of 2)).  Howe subsequently launched a series of lawsuits to enforce these rights.  In fact:

Howe was a non-practicing entity, i.e., a patent-owner who is not actively commercializing his own intellectual property. In modern parlance, Howe was a “patent troll.” Although the “troll” slur has proven exceedingly difficult to define with precision, an oft-cited feature is that the patent-owner makes money solely through royalties obtained through infringement litigation (or threats of litigation). If exacting royalties from manufacturers in the face of infringement lawsuits is a defining characteristic of a “patent troll,” then Howe certainly was a “patent troll” — pioneering these tactics well over one hundred years before this rhetorical epithet was even coined.

The Sewing Machine War — Howe v. Singer (Part 1 of 2)

Even more notable, while it is true that Howe was enforcing a patent based on his own invention, he did not act alone.  He enlisted the help of two investors, the second of which specifically invested in Howe’s litigation strategy, demonstrating a phenomenon that is well known today.

In a similar vein, patent attorney George Selden obtained a patent in 1895 for the combination of an internal combustion engine in a four-wheeled chassis, an automobile.  Selden sold his patent to entrepreneur William C. Whitney, and then assisted Whitney in asserting the patent against prominent auto manufacturers under the name Association of Licensed Automobile Manufacturers.  Thus, it would seem that, as long as there have been patents, there have been savvy investors seeking to profit from the promise of royalties, including royalties generated under the threat of litigation.  This should hardly come as a shock to anyone.  After all, why else would Congress agree that the available damages for patent infringement be “in no event less than a reasonable royalty …” 35 USC § 284.

However, all of this fails to adequately explain why the patent market is as small as it is, especially given that the model for successfully monetizing patents has existed for over a century.  The answer lies in the nature of the assets themselves.  Valuing patents is not like valuing shares of a public company.  Relevant indicators of the value of a given company can be easily reduced to a series of values and ratios that are interpreted by a wide range of experts, and relied upon to make decisions.  The value of a given patent depends heavily on a weighing of various factors including the novelty of the invention (i.e. how likely it is to be upheld as valid), the breadth of the claims (i.e. how likely it is that a given product will infringe), and the value of any infringing products.  Complicating this analysis is the fact that some of these factors work against one another.  For example, a broader patent claim, while more likely to be infringed, is comparatively more vulnerable to a claim of invalidity.  Thus, the market for patents is small not because the value of the assets are limited or because a model for profitable investing has yet to be developed, but rather because only a select few investors actually understand how to value the assets with sufficient confidence to warrant their investment.

Achieving growth in this market will require many things–but I view two developments as critical.   First, asset valuation tools that can make the accurate analysis of patents less complex and time consuming are needed to help IP Professionals make accurate decisions and recommendations to interested investors.  After all, valuations based on existing metrics alone are, at best, incomplete, and at worst, downright misleading.  Second, as with any market, asset aggregators need the legal predictability and certainty that provides the solid foundation necessary to properly form investment and monetization strategies.  Until the law becomes more fully developed in this area, the indeterminacy of the “rule of reason” test will continue to stifle innovation in patent market development a deter a traditional investment approach.  For more on this point, and what the CAFC can do about it, see my previous post.


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Discussion

4 thoughts on “Growth of the Patent Monetization Market

  1. Good post–keep it up! Thanks for the shout out, Patrick. You’re right–I should have said “the modern patent monetization market has existed for less than about 15 years.” Like much of society, we patent attorneys don’t really look to history to describe the present. Everything old is new again, but we think everything is sui generis.

    Posted by Jackie Hutter | November 3, 2010, 12:12 pm

Trackbacks/Pingbacks

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