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IP, IP Asset, Patent, Risk Mangement

IPXI’s Market-based Platform For Exchanging Patent Rights On The Horizon

After several years in the making, IPXI seems poised to officially launch later this year with its first round of IP offerings.  During an interview with Gametime IP, IPXI Director Ian McClure exuded optimism and enthusiasm about the progress of the world’s first ever IP-rights exchange.  McClure noted that the firm is “gaining a lot of momentum,” and added that IP portfolios are already under review by the selection committee, with the first public offerings expected sometime in Q3 of this year. The sale promises to be a major milestone, particularly for McClure who has worked to bring IPXI to fruition for over 2 years.  His enthusiasm for the exchange–and its future possibilities–is nearly impossible to mask as he reflects on the years of hard work giving rise to what should be an exciting end to the summer.

As thoroughly documented by Joff Wild at IAM Magazine, IPXI made a brief splash 2009, announcing the appointment of Gerard Pannekoek (creator of the Chicago Climate Exchange) as its president and CEO.  In late 2011, the world still awaited the announcement of IPXI’s first members.  Since then, however, IPXI’s public activity experienced a significant uptick.  The exchange announced $10 M in funding along with Philips and other companies and universities as its initial members before the end of 2011.  IPXI released its initial rulebook in May and provided an updated list of members, including the all-important founding members, including Philips, Ford, Sony,  Rutgers, Northwestern, University of California, and Lawrence Livermore National Laboratory to name a few.

Unlike a stock exchange, IPXI’s IP exchange provides a platform for IP owners to offer a designated number of Unit License Rights (ULRs)–a contract providing its purchaser with “the right to use a pre-established unit of IP.”  In other words, rather than acquire a portion of patent ownership, purchasers acquire a limited right to use a patented technology.  However, while the exchange promises to bring much needed sunshine and transparency into the patent licensing world, the more important issue is whether IPXI will deliver on that promise.  Success in any patent monetization venture is far from guaranteed, and IPXI faces the even more daunting task of taking a non-traditional path.  For IPXI’s model to be successful, they’ll likely need an ample supply of quality patents covering technology that is easily ‘unitized’ and accurate pricing models.

Of course, while the ULRs represent a ‘consumable’ commodity transacted through the exchange, nothing obligates rights-buyers themselves to use the IP.  Instead, the model allows for speculation among sophisticated investors.  “The exchange offers the ability to speculate on patented technology.”  McClure explains that, by identifying dominant blocking patents in a particular technology, savvy investors can acquire those rights through the exchange during an early stage where unit prices might be discounted, and then sell them at a later stage to operating companies that need to acquire rights to use the technology.

IPXI’s rules also regulate enforcement of IP listed on the exchange, which may further encourage speculation.  “Any stakeholder can petition the enforcement committee if it feels someone is infringing patent rights listed on the exchange,” explains McClure.  Assuming the petition raises a colorable case, IPXI will identify IP under investigation by the enforcement committee, potentially “raising the value of the ULR contracts for the exchange.”  For patent owners, however, the enforcement committee holds far more significance.  Patent owners cannot send a notice letter, much less file a lawsuit without a positive determination by the enforcement committee.

Further protecting the exchange and any rights-owners, the rules also require any monetary settlement or damage awards to be satisfied by the purchase of a ULR or other product authorized for trading on the Exchange.  In other words, licensing–to the extent it covers infringement overlapping with a period of time that the relevant IP is listed with IPXI–must be converted to an exchange transaction.

IPXI’s control over the enforcement process may turn off some prospective participants, but consider a hypothetical future scenario where all relevant companies become members of the exchange.  Aiding patent owners–along with the guidance of the enforcement committee–is an alternative enforcement mechanism through a commercial arbitration process that could end up dramatically saving time and money.  Another benefit, over time, is the development of a liquid, transparent market for IP rights.  If patent owners can establish unauthorized patent usage, determining compensation should become straightforward over time.  McClure cites transparency as another key benefit the exchange should provide.  “If the rate at which industries adopt various technologies becomes known and predictable, parties engage in more informed decision-making.  For example, more information could help investors decide what patents to back in litigation, should that expense become necessary.”

Of course, while pricing structures might take care of itself over time, the exchange still needs to ensure an adequate supply of high quality IP.  IPXI’s selection committee takes responsibility for that role, reviewing every submitted portfolio to ensure its appropriateness for the exchange.  The listing fee, a stout $100,000 presents another barrier ensuring that only sponsors with a substantial investment step forward to use the exchange.  “IPXI will not be a bulletin board service,” stresses McClure.  “We have a strong quality-control process in place to make sure everything listed on the exchange is of high quality.  The listing fee acts not only as a barrier to entry, but also speaks to the quality of the submitted IP itself and compensates the exchange for the significant resources committed to marketing the ULR contracts.”

Prior to an initial offering, IPXI engages the relevant investment community with a series of presentations akin to a roadshow.  McClure says that such pre-marketing efforts are underway.  With first trades likely happening in the third quarter, those marketing and roadshow efforts ought to pick up rapidly in the coming months.

The selection committee itself is composed of representatives of the exchange’s member.  The existence of several operating companies, both large and small, as potential selection committee participants raises another interesting issue: managing conflicts of interest.  Operating company representatives place themselves in positions of trust, reviewing IP portfolios submitted for licensing via the exchange.  In many cases, these IP rights might impact the actual business operations of other operators on the exchange, immediately triggering a vast array of issues in the minds of lawyers everywhere.  Thus, IPXI’s rules include requirements on reporting material conflicts of interest and prohibiting conflicted individuals from voting on such decisions.  “One of the largest responsibilities of an exchange is managing conflicts,” explains McClure.  “Any exchange, whether us, NASDAQ or NYSE, must deal with conflicts on a daily basis.”

Of course, unexpected scenarios are almost sure to arise–a truism of any new, untested business model–and IPXI has yet to officially finalize its rulebook.  As to whether they will be successful, no one can really know for sure.  But they appear to have a structure in place designed to maximize their chances of succeeding, and flexible enough adapt to chancing circumstances which is about the most you could expect from something so radically different.  As someone who has long pined for a viable licensing model more efficient than patent litigation–which is a bit like asking for a window more transparent than lead–I’m certainly hopeful for IPXI’s success.

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Discussion

3 thoughts on “IPXI’s Market-based Platform For Exchanging Patent Rights On The Horizon

  1. IPXI Exchange Model Issues

    Patrick,

    Thanks for the information. I still see a problem with IPXI’s model. Namely – are the number of ULR limited? If so then they will become all used up. Now imagine launching a new product that is going to need a license. Yes, I can buy a number of ULRs, but I don’t know how many I will need. If the product is highly successful, I might need more ULRs than are ever offered. I doubt many business is going to take that risk. Alternatively, if the number of ULRs are not limited how do I know that IPXI will not flood the market? If they can issue additional ULRs for the same patent, I am going to have a very difficult time determining what price I should pay for them.

    There are two broad exchange models out there. One is the stock market and the other is the commodities market. Because Mr. Gerard Pannekoek, CEO of IPXI, comes from the commodities side of the world, it appears that IPXI is trying to model there exchange on a commodity exchange. A commodity exchange has a consumable item it is exchanging and the ULR is an attempt to create a similar consumable item. With a commodity additional units can be produced. With a patent the number of ULRs to the patent could also be increased, but they do not have to be produced in any sense of the word. You can rationally price a future contract for a commodity because the amount of production is limited. For instance, only so much land is devoted to corn production. It takes a certain amount of time for the corn to be produced. The amount of corn in storage can be determined. In addition, the need for the corn is likely to be fairly well defined. None of this is true of ULRs. If you are designing a new product that requires a ULR, then you have no idea what the sales of the product will be in ten years. You have no idea if the underlying technology will still be important in ten years. Finally, you have no idea how many ULRs will exist. So you neither can predict the demand or the supply for a ULR – unless it is only dealing with products and technologies that have been in the marketplace for awhile. You cannot rationally price a ULR (assuming more can be issued for the same patent) because there are no constraints on the issuing of more ULRs.

    A stock exchange model would be more complex, but I believe a more viable model. Each patent or a portfolio of patents could be seen as a company. IPXI could issue shares in the patent groups and the shareholders would receive a percentage of the earnings. These securities would look a lot like oil and gas leases, in that they have a finite life. The value of the patent security would be based not only on the value of the underlying patent(s) but in the ability of the management group to increase revenues. Most economic models show that the biggest return for a patent is to non-exclusively and widely license the technology. Since the patent company would not be a producer, their interest would be consistent with a widely licensed technology. They would also have an incentive to provide technical expertise on how to use the technology and a disincentive for frivolous litigation. They could offer standardized licensing contracts that would also eliminate the high cost of bilateral negotiations. The money from the initial offering would be used to create the management team and promote the patented technology. Investors would have the knowledge of sales and earnings that they have for a company or oil/gas lease. These companies would probably exist today but for Sarbanes Oxley and other related securities laws that make it too expensive to go public in the USA.

    Posted by dbhalling | June 18, 2012, 10:23 am
    • Dale –

      Great question. I can’t answer for the folks at IPXI, but I think the model they are trying to create determines value based on usefulness of the technology, not its scarcity. It’s own literature (previously criticized by Gene Quinn) referred to eliminating artificial supply-side constraints.

      All the same, I think you raise some valid concerns … another factor potentially narrowing the amount of IP relevant to the model.

      Posted by Patrick | June 18, 2012, 10:35 pm

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