NPEs: malevolent or misunderstood?

Companies have always invested in research and development and filed for patents to protect those investments, but now more than ever they are going on the offensive. If one company cannot out-sell a competitor, it may try to out-litigate it.

A competitive edge is not the only reason to litigate a patent. There are companies that do not manufacture or otherwise produce anything in the industries where their patents are normally used.

‘Non-practising entity’ (NPE) is often used to describe companies like Intellectual Ventures, Acacia Research, Millennium Partners and Round Rock Research LLC because they assert patents and agree licensing deals for patents without, as far as anyone can see, manufacturing, producing or selling products covered by those patents. What’s more, this makes them difficult to countersue.

In 2010 there were “more than 2600 occasions when a company found itself in litigation with an NPE”, according to Patent Freedom, a US-based, business-backed organisation that is critical of NPEs. The sticking point is that NPEs seem to assert patents without contributing anything to innovation, so they are viewed as taking away from a market without giving something back in return.

Model behaviour

Intellectual Ventures and RPX Corporation are arguably both NPEs. Based and most active in the US, they buy, license and sell patents that cover inventions in the consumer electronic, software, e-commerce, information technology and communication, medical devices, and advanced physics and engineering areas, as well as many others. They both appear to be good investments too.

Venture capital firm Charles River Ventures was an original investor in RPX, and it is still one of the company’s biggest stockholders. Intellectual Ventures was forced to reveal the identities of its investors to the US District Court for the Northern District of California in May. “Certain funds of Charles River Ventures” emerged. The area where Intellectual Ventures and RPX differ is the use of patent litigation.

Intellectual Ventures asserts the patents it owns, as evidenced by the patent infringement complaints it filed against McAfee, Symantec, Trend Micro, Elpida Memory, Hynix Semiconductor, Altera, Lattice Semiconductor and Microsemi Corporation in December 2010.

An Intellectual Ventures spokesperson had this to say on the company’s use of patent litigation: “Our goal is always to provide companies with access to our portfolio through licensing. From time to time we do litigate when companies choose to use our intellectual property without a licence and our discussions with them are no longer productive.”

Steve Mallouk, vice president of client engagement and channel sales at Intellectual Ventures, does not focus on patent litigation when he describes what the company does. For Intellectual Ventures, its business model focuses on licensing, and it sees litigation as a means of achieving licensing deals.

“In terms of the business model, we do four things. We acquire patents, we package patents, we license patents and we sell patents,” he says. Patent litigation is a tool that is available to a company like Intellectual Ventures to use when it needs to, but it does not define how the company wants to achieve its aims. “We’ve always said that we believe that licensing is the most efficient way to transact in the patent industry,” he adds.

Intellectual Ventures is a firm believer in what it calls the “invention gap”, between the technology that companies want to make and the patents that they hold for it. Intellectual Ventures recognises that “all ideas are valuable, that all companies have an invention gap and that [it] is the best partner...to help them address that invention gap”.

Mallouk gives the smartphone sector, which has seen its fair share of patent litigation, as an example. “No single player in that space owns the rights to all of those patents,” he explains. “The difference between those is the gap. If you look at any technology business, the gap is growing over time because functionality is converging and the pace of technological change is increasing.”

Filling an invention gap is why many customers choose to work with Intellectual Ventures over its competitors, he says.

The company differentiates itself by creating different patent packages based on the needs that a particular customer will have. “We look to create a portfolio of patents in a technology or product sector that will be relevant to our customers, because one of our value propositions is we provide efficient access, a kind of a one-stop shop efficient access to a large pool of patents for our customers,” says Mallouk.

RPX takes a slightly different route. It does not define itself as an NPE because it does not assert the patents in its portfolio in litigation. Mallun Yen, executive vice president of RPX and head of corporate development, M&A and structured acquisitions, says that the core of the company’s business model is “defensive patent aggregation”.

“This means we acquire patents or licences to patents that may be asserted against our current or prospective clients,” she explains. “Our clients look to us to reduce the risk that they may face from patents that are already in litigation or might fall into the wrong hands.”

RPX does not meet the common definition of an NPE—aggressively acquiring and litigating patents— because the company is “unique” and was created to “clear risks in a particular space...in some ways you could say it’s analogous to insurance”, says Yen. Yet it, like Intellectual Ventures, transacts in the patent market and profits from the licensing deals that it does with its clients.

“OUR LICENSING ORGANISATION LOOKS REMARKABLY SIMILAR TO ANY HIGH-TECH SALES AND MARKETING ORGANISATION IN TERMS OF THE TYPES OF PROCESSING THAT’S DONE.”

The emergence of companies like RPX has further clouded the definition of an NPE. The RPX stock-offering prospectus, released on September 15, states that its primary competition in the market for patent assets include “other entities that seek to accumulate patent assets, including NPEs such as Acacia Research, Altitude Capital Partners, Coller IP, Intellectual Ventures [and] Millennium Partners.”

But RPX does differentiate itself enough to avoid some of the more negative terms that are used to describe companies that do not practise their patents. Paul Sutton, a founding partner of Sutton Magidoff LLP, says:

“The business models of Intellectual Ventures and RPX, while similar in that each has accumulated a significant patent portfolio, do differ in a highly significant way. RPX is viewed by many and considers itself a pure defensive ‘patent aggregation firm’. For this reason, RPX is not lumped together with the types of litigation-prone patent trolls which are universally hated by industry.”

Doing that thing you do

Intellectual Ventures is a prolific company. It owns approximately 35,000 “assets”, and over 3000 of those are patents for inventions that originate inside the company. It has spent approximately $1.5 billion on patent acquisitions and has completed 1600 IP acquisition deals since its inception.

Intellectual Ventures’ investment in intellectual property allows it to offer customised licensing solutions to its clients. Its licences vary according to the number of patents, types of patents and the field of use that the company’s customers want to obtain licences to.

There will be “different elements based on what I would call some of the value-added solutions that we provide,” says Mallouk. Strategic buying involves “ways in which we can work collaboratively with them to create design freedom going forward”.

Individual inventors will tend to go to Intellectual Ventures with patents to sell because “they believe we’re a much more efficient and effective licensing vehicle than they would be themselves”, says Mallouk. Once those patents are ready to be licensed, the Intellectual Ventures licensing organisation will take them to market.

“Our licensing organisation looks remarkably similar to any high-tech sales and marketing organisation in terms of the types of processing that’s done,” he says. “Any good sales person... is going to go out to understand their customer, their customer’s strengths and needs, understand the key people in that organisation and understand what their strategy is, and then approach them.”

He adds: “We will oftentimes engage with the CEO, CFO or CTO because ultimately the solutions we provide really help address competitive, financial and technological issues for our customers. Those three executives are critical.”

Companies like Intellectual Ventures are responsible for injecting liquidity into the patent transaction market, according to Mallouk, and giving a number of sellers, “whether those were large corporations, universities, small companies or venture capitalists who had distractive assets on their books”, a vehicle to monetise the assets and inventions that they owned.

Patent value is difficult to pin down, but the market relevance and technical strength of the patent, as well as industry royalty rates, is how most buyers and sellers get to a point of view on price, says Mallouk. And people have very much woken up to the idea that their patents are valuable commodities.

He adds: “[However] a lot of this is still a relatively disorganised market without one kind of standard clearing house. We’re starting to see more liquidity and more participants in the market and I think what that does is it drives, as in any market, I wouldn’t say full visibility on pricing but better market clearing price mechanisms on the buying and selling of assets.”

RPX’s Yen agrees, and she says that it is her company’s mission to organise the patent transaction market and make it more efficient. “The mission is to remove the risk of patent litigation and really become a patent clearing house of sorts,” she says.

She adds: “Patents can be valued as real assets, but when you have the litigation dynamic it very much clouds the ability to have any real dialogue about patents. Most other entities have a complete lack of transparency; we have a much more transparent methodology.”

RPX operates a subscription model that has a “very transparent rate card”, according to Yen. Depending on a company’s net income, RPX will charge its clients a subscription fee of between $60,000 and $6 million. They sign up for multi- year membership agreements and get access to every patent in RPX’s portfolio, as well as the company’s data and intelligence on patents. RPX also obtains fully paid up, perpetual licences to patents that it divests for its clients.

Yen says: “In order for a programme like this to work, the more companies that join the more effective it would be, because it’s more dollars deployed toward reducing common risk. Our business model aligns with the interests of our clients. We don’t assert our patents, and that enables us to develop a strong and trusting relationship with our clients where they’re comfortable with telling us what might be an issue. That open dialogue is something that we value very highly.”

Giving back

It is clear that NPEs can play a valuable role in the patent system, according to John Pegram, senior principal at Fish & Richardson PC. They create “alternative ways for innovators to monetise their inventions”, and they can be good news for lawyers too. “As lawyers, we may negotiate and/ or litigate for or against NPEs. That creates legal work and attracts some lawyers,” says Pegram.

However, NPE-instigated litigation does negatively affect innovation and the patent system. Pegram says: “The troll model, of suing many defendants and settling with each for less than the cost of litigation, does not appear to advance the patent system and some judges feel those cases are unnecessarily taking up their time.”

RPX and Intellectual Ventures both employ business models that have proven effective at achieving their objectives. RPX continues to stay out of litigation for the benefit of its clients and Intellectual Ventures continues to sign up licensees without litigating every patent in its portfolio. When it comes to NPEs, there is no simple answer.