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IP, Patent, RPX

Patent Owners ‘Fleeing’ RPX Acquisition Model

Patent owners, including several currently relying on litigation, are “fleeing” RPX in favor of ICAP’s new Covenant Not to Sue (“CNS”) program, according to a source working closely with the brokerage firm.  RPX may not be dead quite yet, but ICAP has their shovels out, ready to lend a hand digging RPX’s grave.  Patent owners predictably prefer ICAP to RPX for a number of reasons, but a good turn-out of corporate representatives ready to acquire rights will confirm that both buyers and sellers want an ala carte marketplace for IP dealmaking.

Right before their IPO, I predicted that patent owners would become increasingly reluctant to work with RPX as their client base expands.  After the $38.5 M purchase of rights to the Round Rock portfolio,  I predicted that patent owners recognized a significant value in ICAP’s process and that buyers would respond to an efficient alternative to litigation.  Significantly, both predictions are starting to take shape, which threatens the very existence of the patent licensing ecosystem upon which RPX relies.

For those that don’t know, the CNS auction is a new process, which debuted earlier this spring, where the buyers bid for a “Covenant Not to Sue” from the patent owner, rather than bidding on outright ownership of the patent.  The covenant is a legally binding agreement preventing the patent owner from enforcing its patent rights against the winning bidder, effectively amount to a non-exclusive right to use the inventions claimed.  The auction is the brainchild of ICAP Patent Brokerage, heavily promoted by CEO Dean Becker and SVP Kevin Fuir, and presents a significant opportunity to both “sellers” and “buyers” of convenants.

Consider the “sell” side first.  When RPX approaches patent owners, they need to offer a price that will compensate for all clients in RPX’s current roster, regardless of whether each client has any need for the technology or not.  In effect, RPX asks patent owners to make one sale that will effectively exhaust their ability to monetize the patent with almost 100 companies.  For the opportunity, RPX effectively seeks a “bulk discount” for the privilege of monetizing a huge chunk of the market in one fell swoop.  In addition, RPX then uses your patent to “pitch” other companies with whom patent owners would otherwise have separately dealt. As RPX’s client roster expands, this offer becomes less and less attractive unless RPX brings more and more cash to the table, effectively choking off the company’s growth.

Not even with a free 100-roll pack of toilet paper thrown in does the RPX “wholesale club” pricing model present value to most patent owners.  Instead, ICAP attracts patent owners with an opportunity to put the entire market in competition with one-another, providing both cash value and priceless information.  Consider, at the end of the auction, patent owners not only have a high bid (at least as of that day) for rights to practice their technology, but they also know the number of bidders.  These two numbers combined can provide a valuable check on the likely size of the market for the patent owner’s technology.

Next, consider the “buy” side.  When RPX approaches potential new clients, it attempts to sell its existing portfolio, lock stock and barrel, along with promises of expansion. Of course, by acquiring a diverse array of patented technology, RPX attempts to appeal to the entire market.  However, the inefficiencies of this process are blatantly obvious.  While convergence of technologies makes RPX’s approach seem reasonable, the simple fact is that a great deal of RPX’s patents are largely irrelevant to a great deal of their clients.  In addition, RPX pledges never to use its patents offensively in the first place. Unless the price of a membership represents a discount to the disposal of current patent litigation a potential client is dealing with, the decision to become a member is likely based more on coercion and threats than on reason.

Further, since RPX members get lifetime vesting after a short membership term, the company cannot grow without continuing to acquire patents.  RPX’s ability to acquire patents is short-circuited by the size of its client roster.   In addition, RPX thrives on the expensive conflict and confrontation of patent litigation.  Patent owners seeking out alternative monetization strategies threatens to disrupt this whole process.

Finally, ICAP effectively keeps RPX out of auction process entirely by prohibiting syndicated bidding.  Each bid submitted via ICAP can purchase only a single CNS, and bidders may bid on behalf of only one buyer.  This prevents RPX from syndicating cash from multiple buyers to dominate the market.  RPX likely will participate as a proxy bidder just to have a role in the ICAP auction, but in that respect they provide no more value than any other proxy.

ICAP’s auction is scheduled for September 27-29 in Los Angeles. RPX’s funeral arrangements have not been announced.

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Discussion

11 thoughts on “Patent Owners ‘Fleeing’ RPX Acquisition Model

  1. Not the first time one person’s business model innovation is another’s demise. Just ask the folks who invested in Blockbuster.

    Posted by ipstrategist | August 18, 2011, 7:55 am
    • My GM buy didn’t end all that well either. Is it ironic, or just amusing that in this case the business model innovation is over ways to capitalize on innovation-based assets (i.e. patents)?

      Posted by Patrick | August 18, 2011, 9:52 am
  2. I think RPX is facing headwinds of a different sort. They’re going to have difficulty scaling their model because NPE assertions are just not as much of a threat to middle market operating companies as they are for large-cap tech companies (most of whom are already customers). I hear RPX is going to start offering a form of defense cost insurance. Product differentiation is one way RPX might be able to remain competitive in the marketplace for patent risk transfer.

    Posted by Jorge M. Torres (@jorgemtorres) | August 18, 2011, 11:10 am
    • They did mention an insurance product during their second quarter conference call. Such products have, so far, failed to succeed in the market, but I’ll be interested to see what they come up with.

      Posted by Patrick | August 18, 2011, 11:51 am
  3. Good business relationships are based on delivering fair value with good service. That kind of relationship always has growth potential.

    RPX’s deals with inventors are much like Intellectual Vultures deals, unsatisfying one night stands where the seller is left with a hangover and poor value.

    ICAP’s deal delivers more value than just the sale. It allows an owner of IP to gauge market value and buyers who lose out are likely to come to the table to negotiate a license. Just as important is that ICAP’s business model always has potential for more deals with their clients while RPX’s does not.

    As an inventor, I much prefer dealing with a seller’s agent as opposed to a buyer’s agent. A seller’s agent gain depends on my my interests while a buyer’s agent’s motivation is to screw me over on behalf of their clients.

    The beauty of ICAP’s business model is that it sets the stage for patent pirates to fight over a single tasty morsel. It delivers entertainment value by exposing that there is no honor among thieves.

    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 | August 19, 2011, 10:40 am
  4. I am surprised that the CNS model would be promoted by any entity that is trying to promote innovation and inventor’s interests. As an inventor, I am very disturbed by what I see as a misuse of inventions and patent rights. The CNS auction model is a “wolf in sheep’s clothing” since it focuses on the value of avoiding litigation and not on the potential value of the inventions being used.

    While I generally agree that the “ICAP auction of CNS” model is somewhat interesting in the continuing development of an open market for patent rights, I believe nearly all of the benefit flows to the seller of CNS rights who, so far, is not even the patent inventors. Conversely, it is potentially very damaging to innovation in general, which depends on the ability to innovate on others innovations. The CNS sale creates a false sense of patent protection, versus the actual protections gained when patents are sold and/or licensed, and thus subject to the laws designed to govern the use of these rights.

    While RPX may not offer top prices, they do bring a large amount of inventors and product making companies together. I do agree that as the number of companies increases, the pool of money must also increase. If it decreases, the RPX model becomes less interesting to promoting innovation, since most of the advantage is then tilted toward the product companies that are subscribers. The biggest issue I see with RPX, is that there is no real connection between the amount of money paid and the future value of the rights granted. This leaves an inventor with only a snapshot of the current value, and no real connection to the full value of the invention to the products using that invention. However, as an inventor, I also know of no other place I can negotiate a deal that results in licenses with 100 companies at once, nor anything approachable to the value that can be had this way, perhaps with the exception of selling to a large patent holder that gives a future share in their actual results. As long as it is not blatantly giving the advantage to the licensees, the discount effect in the RPX model is actually appropriate, given the alternative of trying to negotiate each of those licenses separately.

    I agree that for an inventor, the sale of any patent right directly to a product company, has at least opportunity to afford some advantages over selling to an agent that aggregates these rights. However comparing Black Rock in this regard is not a valid comparison, since it was not being offered by the original inventor/seller, but from someone who aggregated the rights from the original owner and then offered them for CNS. I see no aspect intrinsic to a CNS, where the inventor benefits over a more traditional sell of a patent or license.

    I further believe the CNS sale falls short of ideal for promoting innovation and invention in several respects:

    – A CNS is not a patent license, which leaves open the possibility of stifling downstream innovation that make use of the product subject to the CNS. For example, claims in the same patents that were the subject of the CNS could be enforced against a product that includes a component that is covered under the CNS, without violation of the covenant granted. This is possible when the patent includes claims that are directed to higher level systems than the component covered by the CNS. This results in a very tricky way to get around all aspects of patent exhaustion, including the affect defined by the LG-Quanta case, as decided by the US Supreme Court. Since the CNS is not a license, it results in no first-sale of a licensed product, and thus no downstream exhaustion of patent rights. In this case, the advantage is strongly weighted solely to the seller of the CNS, leaving the CNS buyer, and buyers of their products, without the normal protection that comes from a genuine patent license.

    – A CNS sale does nothing to encourage the real exchange of inventions between product making companies and sources of invention. Instead it continues the focus on using patents as weapons. The CNS sale is simply a promise not to litigate, which puts the laser focus on litigation. The promise is to not sue, leaving little to encourage and promote use of the inventions covered by the CNS. Black Rock is the perfect realization since it was a promise, coming from a very active litigator, who had aggregated the rights he was promising not to use. There was little doubt in the product companies’ mind that the holder would indeed litigate. Coming from this source, the CNS is effective to raise money for litigators, but not to reward inventors, or encourage innovation.

    (However, I do think the Black Rock auction was brilliant in that it got all of the potential future licensees to do all the work of analyzing the portfolio without having to send any notice or claim that would create basis for declaratory judgment, now or in the future).

    – The CNS sale is only about cost avoidance and not about wealth creation. Things that promote innovation and invention should be largely geared toward wealth creation. A CNS sale does not provide basis to tie the value of the invention to the future success (or not) of a product. An inventor and a product company cannot use a CNS sale to share in the success of a product that incorporates a good invention.

    The CNS will eventually leave both the inventor who sold his invention to the CNS seller, and the product making company who bought the CNS, wondering why they fell for a blatant trick to steer even more money to the litigators, who now won’t even have to litigate! They will realize they participated in the deception, while leaving no real protection for the further innovation on top of the inventions that have been misused. They will understand the CNS for what it is: a way to get around what patent laws were designed to protect.

    Posted by prolific inventor | August 23, 2011, 9:39 pm
    • I won’t have time to address everything in your lengthy comment, but I think you should consider a few points:

      1. A CNS is not a patent license, but, for the buyer, it is the functional equivalent of a non-exclusive, lump sum fully paid up license in that neither arrangement encourages or discourages the buyer to use the patented invention. Most large corporations want the certainty of a lump sum, fully paid up payment.

      2. If you’re concerned about patents being used as weapons, RPX is far more odoriferous than the CNS option. RPX’s profits derive directly from elimination of litigation expenses, since the patent owners that transact with them still want good value for their inventions. The CNS option offers both the patent owners and buyers to drop their weapons and split the savings between them. ICAP can take less than RPX absorbs from each transaction because their model attracts a larger volume of aptents.

      3. As far as the inventor benefiting from the CNS versus a traditional sale, I respectfully disagree. An inventor and close friend of mine just wrapped up a major, industry-wide licensing effort (since the CNS auction didn’t exist when he got started) and ended up grossing 20x the highest “purchase” offer that had been made to him. Granted, this took years, and many layers of service providers had to be paid along the way. The CNS auction offers a way to short circuit the process.

      Posted by Patrick | August 24, 2011, 8:59 am

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