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IP, Patent, RPX

Why Is RPX Going Public? Ask Willie Sutton

Last week, we learned that RPX Corporation (which stands for “Rational Patent Exchange) will soon have an IPO, offering up to $100 M worth of stock to the public. A lot has been written by bloggers and journalists, referring to RPX as  Defensive Patent Acquirer, Defensive Aggregator, and Patent Risk Manager.  Others explain that RPX is going to profit by “fixing the patent mess.” No description is more puzzling than the description “Patent Troll Insurer.”  Maureen O’Gara writes that RPX is “apparently making a killing selling patent troll insurance.”  Techrights takes a different view, describing the organization as a cartel.

All of these descriptions really miss the mark, and I’ve not seen a single article use the phrase “protection racket,” much less explain that RPX is selling a solution to a “problem” that it needs to perpetuate in order to ensure its survival.  Let’s clear up what RPX actually does before delving into its motivations for going public.

Granted, RPX’s own description of a “key component” of its solution is its Defensive Patent Aggregation Service. They even go so far as to say that it is “analogous to insurance.” In other words, RPX acquires patents. Lots of patents. They have rights to more than 1500 patents, or so they claim. And every RPX client receives a license to all of these patents, which RPX has pledged never to litigate. (Yes, unlike the vague suggestions from Intellectual Ventures, RPX put the “n-word” in black and white: “We will never use our patents offensively.”)

How do you become a client? Well, you pay. Somewhere between $40,000 to $5.2 million per year, depending on the size of your company. And once you’re in, you’re covered for patents owned at the time you join and any  that are acquired during your membership, even if they are later sold to third parties. You can see a list of some of the many companies already signed on with RPX here.

Willie Sutton (1901-1980) Source http://www.fb...

No comment on the use of a bank robber's likeness as social commentary on patent licensing.

While they most likely lock in their members to a fixed, minimum membership period, their description implies that you can exit, stop paying the annual fees, and still retain the licenses to anything they owned while you were a member.  Seems like a smart thing to do, except for the fact that they keep growing their portfolio. Part of their motivation to keep you in the club, is to continue to acquire patents that might otherwise be asserted against you. Thus, each member’s continued patronage is engendered by RPX’s perpetuation of patent threats (i.e. the “problem), and their absolution of those threats on behalf of its members (i.e. the “solution”).

On the other hand, if you believe their pledge to never use their patents offensively, those growing acquisitions shouldn’t really concern you, which brings me back to one of my favorite historical characters, Willie Sutton. Apparently more legend than history, Sutton was a bank robber credited with providing the most obvious of answers when asked why he robbed banks: “that’s where the money is.” Like so many other things in life, when the question is why someone is doing something, this is often the answer.

Hopefully, you can appreciate two things about RPX’s business model: 1) there’s a finite amount of companies operating in the United States; 2) there’s a growing number of patents. As RPX practices is “catch-and-release” licensing, the companies it temporarily captures are later gone for good, unless RPX can acquire some more bait. Thus, persistence of the business model relies on continued and aggressive patent acquisition. RPX recognizes this, and claims to review 70 patent portfolios a month and spent $250 M as part of these ongoing efforts.

Nevertheless, RPX is going to experience some periods of time where the income from memberships is outpacing the expenses on acquisitions. In fact, according to the S-1, it’s experiencing one of those periods right now, possibly motivating its decision to go public. RPX can pick up a huge influx of cash in this process (taking the money from where it is, to where RPX wants it to be), perhaps as a way to finance its patent acquisition process. The investors, meanwhile, are going to be crunching the numbers and betting that the highs are higher than the lows are low.

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Discussion

21 thoughts on “Why Is RPX Going Public? Ask Willie Sutton

  1. Patrick – great analysis. As I understand it, new members do not permanently get the rights to IP held at the time they become members. Instead, they are given those rights after 2 yearsof membership (pretty sure it’s 2). That is, after N+2 years of membership, you get rights in perpetuity to the IP held in year N of your membership. Otherwise, should you terminate, you lose those rights. Thereby, there is a built-in penalty for not renewing your membership.

    Posted by Kyle Jensen | January 31, 2011, 8:24 am
    • To clarify…I believe you lose the last 2 yrs of acquired IP rights if you do not renew your membership.

      Posted by Kyle Jensen | January 31, 2011, 8:27 am
      • Kyle, thanks. I admit I’ve not seen the subscription agreement, but their web site says “Over time, our clients receive perpetual license not only to the patents held when they became members or purchased after they joined, but also to any patents sold during their membership.”

        My general understanding is that you have to maintain your subscription for a minimum period of time, after which the licenses you’ve earned become perpetual. Perhaps this is done on a 2 year rolling basis.

        That being said, if you take RPX’s monastic vow against patent violence seriously, why would you care whether you had licenses to their patents or not?

        Posted by Patrick | January 31, 2011, 8:39 am
        • Patrick – well, as you say, to combat the freerider problem, they’re probably doing more catch and release style licenses, similar to Allied Security Trust. So…the benefits would only be available to members…seems to make much more sense to me than purchasing the patents.

          Posted by Kyle Jensen | February 1, 2011, 10:17 am
          • Actually, I have a good idea of what they’re doing to minimize freeriders, and it opens up a whole host of other issues. I’ll write about that later this week or next, so stay tuned …

            Posted by Patrick | February 1, 2011, 10:20 am
  2. Very good article except I think that there is at least a 40% downside for inventors dealing with RPX. They rank in the same category as Intellectual Vultures in that regard. So far, every patent aggregator I have seen cons inventors out of most of the value of their patents. Granted that patent aggregators are not quite as bad as corporate Patent Pirates but their goal is still to take 90% to 99% of the value while Patent Pirates goal is to take 100%. Inventors are much better off dealing with contingency litigators and patent enforcement entities than dealing with patent aggregators.

    Ronald J. Riley,

    President – http://www.PIAUSA.org – RJR at PIAUSA.org

    Other Affiliations:
    Executive Director – http://www.InventorEd.org – RJR at InvEd.org
    Senior Fellow – http://www.PatentPolicy.org
    President – Alliance for American Innovation
    Caretaker of Intellectual Property Creators on behalf of deceased founder Paul Heckel
    Washington, DC
    Direct (202) 318-1595 – 9 am to 9 pm EST.

    Posted by Ronald J Riley | February 1, 2011, 11:46 am
  3. This is certainly something I have to do more research into, appreciate the posting.

    Posted by Nelda | February 1, 2011, 12:17 pm
  4. My interest in patent aggregators has always been rather or not inventors are getting a fair deal. I had not considered rather or not our adversaries get a good deal, frankly I think they deserve any fate which comes their way.

    Still, I found the protection racket analogy interesting and have been considering it.

    It seems to me that patent aggregators cannot protect their clients from any inventor who is smart enough to seek out patent enforcement entities.

    We have been watching patent aggregators for some time. We have not ye taken a public stand or published a report about aggregators to our members. I do think that we now have enough information to do so.

    Once we publish our findings I think that aggregators will find it much more difficult to buy IP far below it’s real value. Their business model only works when they are dealing with inventors who lack information.

    I do not think that as structured that their business model is sustainable.

    Ronald J. Riley,

    President – http://www.PIAUSA.org – RJR at PIAUSA.org

    Other Affiliations:
    Executive Director – http://www.InventorEd.org – RJR at InvEd.org
    Senior Fellow – http://www.PatentPolicy.org
    President – Alliance for American Innovation
    Caretaker of Intellectual Property Creators on behalf of deceased founder Paul Heckel
    Washington, DC
    Direct (202) 318-1595 – 9 am to 9 pm EST.

    Posted by Ronald J Riley | February 1, 2011, 9:02 pm
    • I agree, the most positive thing about RPX going public is that it will bring more proverbial “sunshine” into an aggregator’s acquisition process. Also, by focusing on litigated patents, RPX in particular has little capacity to help inventors that haven’t already taken steps to enforce their patents.

      Posted by Patrick | February 1, 2011, 9:44 pm

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