A Market-Based Alternative to Patent System Challenges

February 2014

By Ian McClure, Director, Intellectual Property Exchange International, Inc. (IPXI®)

On June 4, 2013, the US White House outlined an initiative that takes aim at numerous issues which many people believe are problematic for the intellectual property (IP) market and innovation. Among the issues highlighted were the lack of transparency, the need to create a level playing field between all innovators, and excessive or frivolous litigation. Gene Sperling, Director of the National Economic Council and Assistant to the President for Economic Policy, wrote in a recent post on the official White House Blog: “It’s clear that the abuse of the patent system is stifling innovation and putting a drag on our economy… it’s time to act.” However, legislative patent reform of the type being proposed today in the United States could have sweeping, unintended consequences. When the intended subject of legislative action, for example, is categorized and defined by such vague and fast-changing terms as “non-practising entity” or “patent assertion entity”, and when those categories have different meaning depending on perspective and disposition, it can be difficult to tailor the effect of such reform.

“IPXI, the world’s first financial exchange for IP licensing and trading offers a market alternative to litigation and private bilateral licensing,” says Ian McClure (Photo: IPXI).

Flourishing market for patents

Over the last decade, the market for patents has flourished. Patent intermediaries, brokers and other agents have developed a liquidity pool for patents and patent rights, including license rights, covenants not to sue and other hybrids. These products are marketed, sold, purchased, bartered, exchanged, traded, consorted, leased and disposed of just like other assets, goods or properties.

However, unlike many other markets, the nascent market for patent rights is composed solely of private, bilateral dealings. In many respects, the market as it exists today operates in a rogue environment. There is little or no transparency of market information or means of identifying market behavior. The only mechanism for regulating this emerging market is through the courts, where predictability is difficult and barriers to entry - high legal costs - create the conditions for certain parties to exploit such uncertainty. For example, the American Intellectual Property Law Association (AIPLA) estimates that on average, when between US$1 million and US$25 million is at risk, patent litigation costs reach US$2.5 million, and when more than US$25 million is at risk these costs reach US$5 million. Knowing that the only referee available entails an investment of this size and that patent litigation outcomes are rarely predictable, certain patent holders push for quick cash settlements.

In a recent letter to the United States Congress, 60 US patent law professors stated that “high litigation costs and a widespread lack of transparency in the patent system together make abusive patent enforcement a common occurrence both in and outside the technology sector. As a result, billions of dollars that might otherwise be used to hire and retain employees, to improve existing products, and to launch new products are, instead, diverted to socially wasteful litigation.” But what can be done to diminish such exploitative behavior? A financial exchange for licensing and trading IP rights, such as the recently launched Intellectual Property Exchange International, Inc. (IPXI®) could help create the information standards and pricing mechanisms required and could also reduce the need for legislative reform.

IPXI: the world’s first financial exchange for IP licensing and trading

IPXI, established in 2007, is the world’s first financial exchange for licensing and trading IP rights. It offers a market alternative to litigation and private bilateral patent licensing. Many of IPXI’s members, which include over 60 of the world’s leading corporations, universities, research laboratories and financial institutions, have helped develop the Exchange and are committed to listing their IP in it.

On June 5, 2013, IPXI unveiled its first product offering covering a portfolio of 600+ patent assets – including 225 granted patents – relating to organic light-emitting diode (OLED) technologies for display screen applications developed by Koninklijke Philips N.V. (Philips).

Improving market transparency

One of IPXI’s core objectives is to improve market transparency in relation to the commercial exchange of patent rights and to help level the playing field for innovators. First, IPXI makes publicly available all critical information related to the owner of the rights and the direct beneficiary of their transfer through the Exchange, including the terms of any rights transfer. IPXI provides price as well as other relevant information– including an analysis of the quality of the assets and aggregate purchasing and trading data - and standard terms to all potential licensees for each portfolio offering. “We strongly believe that IPXI will increase the transparency of the IP market place with fair market prices for the IP being exchanged. We are one of the first companies to have listed some of our IP on the exchange and expect more companies to follow shortly,” stated Ruud Peters, Chief IP Officer of Royal Philips Electronics, a Founding Member of IPXI.

As the economist Friedrich Hayek argued in The Pure Theory of Capital, the goal of a market is the preservation and use of the unique information contained in the price of a good. However, in a patent market without benchmarks and with skewed outcomes resulting from the cost of litigation and subjective intangibles such as bargaining position and expected probabilities of success in litigation, the usable information contained in a price is muddied. This creates perfect conditions for “patent assertion entities”, popularly referred to as patent trolls, to capitalize on situations where assets with questionable validity or claim scope are attributed some value simply because there is uncertainty about their ultimate value.

IPXI Business Model (Photo: IPXI)

Rules-based procedures

IPXI implements rules-based procedures and operates a process of committee review to objectively evaluate the assets it offers and to inform the market about the quality of the portfolios listed on the exchange. This includes an exhaustive quality evaluation by IPXI using independent third-party research. Information relating to patent validity and evidence relating to the use of or prospective demand for the technology, including market forecasts, is publicly available on IPXI’s Trading Platform. With respect to the Philips offering for OLED technology, over 1,100 supporting documents relating to the offering are available to interested parties on the IPXI website.

Before launching its first offering, IPXI released its Market Rulebook, which is designed to guide the behavior of those participating in the IPXI market and contains rules regarding the creation, issuance, enforcement and auditing of the Exchange’s primary product, a commoditized non-exclusive license right called a Unit License Right™ (ULR™) contract. Importantly, the IPXI Market Rulebook was developed with the support and insights of many of its members who participate on the Rules Committee. Any member of the Exchange may submit proposed rule changes to this Committee.

Until the patent-owning community wholly adopts a central marketplace, such as IPXI, with reliable market behavior standards and benchmarks, the chances of eliminating the sophisticated and lucrative “patent assertion entity” business model are slim.

Taming current IP marketplace conditions

“In the last two years, the number of lawsuits brought by patent trolls has nearly tripled, and account for 62% of all patent lawsuits in America,” noted Gene Sperling in the aforementioned White House communication. While some caution needs to be exercised in categorizing those who qualify as “patent trolls” and those who do not, this litigation phenomenon is having a clear impact on the way business is done. Money and time spent worrying about “abusive patent litigation” saps resources that could be better spent creating new products. According to the White House report, spending on patent litigation in several leading corporations now outstrips spending on research and development. Similarly, among smaller companies, 40 percent of technology startups targeted by “patent trolls” reported litigation or the threat of litigation had a detrimental impact on their business operations. There may be a place for non-practicing entities to operate through IPXI, but their success will depend on the qualification of their assets and their commitment to operate under the same rules and levels of transparency as the rest of the market. If these elements are met, their success cannot be deemed “abuse” of the patent system. In other words, the problem is not “patent trolls” as such, but the current characteristics of the patent market which provide perfect conditions for their business model to succeed.

While the America Invents Act (AIA) adopted in September 2011 goes some way in updating the legal patent landscape in the United States, the issues of abusive litigation and a lack of transparency in the patent marketplace require further consideration. By adding to the mix market dynamics similar to those that have resolved market inefficiencies in many industries for hundreds of years, IPXI presents an alternative to more legislation. Before asking government to set standards and control market behavior, market participants may first consider doing what other efficient markets have done in the past, that is, develop and adopt a central marketplace and market behavior standards.

The WIPO Magazine is intended to help broaden public understanding of intellectual property and of WIPO’s work, and is not an official document of WIPO. The designations employed and the presentation of material throughout this publication do not imply the expression of any opinion whatsoever on the part of WIPO concerning the legal status of any country, territory or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. This publication is not intended to reflect the views of the Member States or the WIPO Secretariat. The mention of specific companies or products of manufacturers does not imply that they are endorsed or recommended by WIPO in preference to others of a similar nature that are not mentioned.