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.
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.
- Patent Risk Advisory Firm RPX Files For An IPO (techcrunch.com)
- Is RPX’s “Defensive Patent Aggregation” Simply Patent Extortion By Another Name? (techcrunch.com)