For the half-year to 30 June 2014, the IPKat's regular team is supplemented by contributions from guest bloggers Alberto Bellan, Darren Meale and Nadia Zegze.

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Sunday, 10 February 2013

What Exactly Does Intellectual Ventures Do That Seems to Bother (Some) People?

There are few companies in the IP firmament that attract as much as pro and con as Intellectual Ventures, here and here. Since its establishment more than a decade ago, this privately-held company has engaged in a combination of carrying out internal R&D, partnering with research entities and acquiring patent rights (apparently mostly the latter), whereby it is now reported to be one of the five largest owners of US patents. Revenues are based primarily on licensing and, since 2010, the company has also engaged in the filing of law suits to enforce its rights.

It is difficult to get one's Kat paws fully around the company because it does not tend to disclose the full range of its activities and, indeed, it has been accused of artfully camouflaging at least some of what it does. For this reason perhaps, as well as the sheer scope of its patent holdings, the company has become a rhetorical lightning rod for the current state of the patent system. Its supporters see it as breaking new ground in the monetization of patent rights; its detractors see it as the worst kind of patent troll or non-practising entity (NPE), the Death Star of the IP world.

It is not this Kat's intention to enter into the general debate about Intellectual Ventures. Rather, this Kat wishes to focus on a couple of brief quotes attributed to Melissa Finocchio, vice president and chief litigation counsel of the company, as a prism through which to gain better understanding how this NPE is challenging the way that we approach the patent system.

The source of the quotes is a short report in the February 5, 2013 issue of IP Pro The Internet.com here. Entitled "Intellectual Ventures secures another settlement", the piece reports that Intellectual Ventures has settled its patent infringement suit against the chip manufacturer Microsemi. The piece then briefly discusses the result of other litigation brought by the company and its involvement on the recent sale of certain Kodak patents. In this context, the following two quotes were brought:

"In a statement, Melissa Finocchio, vice president and chief litigation counsel for Intellectual Ventures, said: 'In the past 12 years, [the company] has assembled a world-class patent portfolio and this settlement is further confirmation of the strength of our assets'".

" [In] a November 2012 statement, Finocchio said: 'We have invested in one of the most extensive intellectual property portfolios in the world and the succession of recent settlements validates the strength of this portfolio. We are committed to fulfilling our responsibility to our customers and investors by licensing our assets and by defending our rights in court when necessary'".
Imagine, for a moment, that instead of describing Intellectual Ventures, the quotes referred to a company such as IBM or Samsung. Would anyone find them controversial? Weren't we all told over a decade ago that patent portfolios were being underexploited commercially, and that licensing is a way to realize their full potential value? And if litigation is necessary, now and then, to support such licensing efforts, that is certainly within the right of patent holders. Looking more generally, isn't the goal of any profit-seeking entity to deploy its assets in a way that maximize their value? And what is wrong in a company fulfilling its responsibility to its investors and customers; aren't they central stakeholders for the company?

Ok Kat, all of this might be true, but they apply to hard assets-- intangible assets are different. That is fine, but pointing out that there is a distinction between hard and intangible assets does not explain why exploitation of an otherwise unused patent asset but its original owner is okay, but transfer of that asset to a third party for the sole purpose of seeking to exploit the asset by a combination of benign licensing overlaid by litigation, if necessary, is unacceptable.

Arguing that the former scenario is consistent with the purposes and rationale of patents, but the latter does not, seems to beg the question. After all, there is no accepted common understanding regarding the purposes and rationale of patents. Even if there were such a consensus, why should that matter: if Intellectual Ventures, or any other NPE, is exercising its patent right in a lawful way, why should the purposes and rationale of the patent system matter?
This Kat has no ready answers to his own questions, but he would like to conclude with a tentative suggestion. Maybe one way is to consider the notion of economic rent-seeking. We do not mean the relationship between a landlord and a tenant for the right of the latter to occupy and use the premises of the former. Rather, we mean, as defined in Wikipedia, the
"spending [of] resources in order to gain by increasing one's share of existing wealth, instead of trying to create wealth. The net effect of rent-seeking is to reduce total social wealth, because resources are spent and no new wealth is created. It is important to distinguish rent-seeking from profit-seeking. Profit-seeking is the creation of wealth, while rent-seeking is the use of social institutions such as the power of government to redistribute wealth among different groups without creating new wealth. Rent-seeking implies extraction of uncompensated value from others without making any contribution to productivity."
Is there something in the notion of "rent-seeking" that might explain why the actions of an NPE vis-à-vis a patent are criticized, but the same action taken by the original owner of the patent is not? After all, the NPE neither engages in the creation of the invention nor in its exploitation. Or has this Kat had one too many portions of catnip?

13 comments:

Mark said...

Very interesting. A possible, tentative analogy: patents can be thought of as weapons to protect an owner's "turf". We can understand, and pethaps sympathise with, the use of those weapons to defend one's intellectual creation. But if the weapons are sold to "mercenaries", the noble cause is no longer there. If those mercenaries act with remorseless logic to "monetize" the IP, without any motivation to get the intellectual creation into circulation, we lose the previous sympathy.

Fanciful stuff, perhaps. But this way of thinking explains why a university is not a troll, despite not making the patented product nd merely licensing it. And why the "old" Brtitish Technology Group, which acted as a licensing vehicle for UK universities, was also not a troll. And why some organisations that may look more like trolls are keen to emphasise their credentials as developers of technology and not just pure monetization outfits.

The other aspect that is troll-like is the aggression by which a party pursues its litigation, perhaps again unconstrained by the reputational concerns that an IBM or Stanford might factor into their strategy.

Anonymous said...

An NPE may not directly engage in the creation of an invention, nor (on the basis that "exploitation" in this context means something like "working the patented invention"), its exploitation.

However, they do provide additional financial incentives to inventors. Not all inventors may have the resources to work the patented invention, nor to enforce their patent rights against infringing third parties. The inability to work the invention or enforce the patent renders their patent rights largely useless. Selling or licensing their patent rights to an NPE therefore allows impecunious patentees to derive a different form of income stream (lump-sum or licensing revenue rather than sales revenue) from their invention, which encourages them to invent regardless of their ability to manufacture and/or enforce.

This doesn't seem to be rent-seeking to me. Instead, it seems economically more akin to internalizing a positive externality, which most economists have long agreed is a good thing (since it encourages appropriate activity levels, here, more invention regardless of ability to manufacture and/or enforce).

Jackie Hutter, Intellectual Property and Patent Business Strategist and "Recovering Patent Lawyer" said...

I get such a kick out of this conversation. A great number--perhaps a majority of--patentees that bring suit against another company are likely not practicing the claimed invention. This includes the operating companies that testify before the US Congress that "patent trolls" are ruining everything for them. And, of course, almost all university patentees likely fit within the definition because they are not patenting to create a product but to "seek rents" against those that do so.

Entrepreneurs will always find a way to make money from new business models. Patents facilitate an ever increasing number of business models today. Certainly, the ability to obtain a preliminary injunction delineates the operating companies from the "trolls," but at the end of the day, whether someone can enforce a bare patent against an "real innovator" is just a business decision. Just as it is a business decision whether someone should pay the rent demanded by a patent owner like IV.

Coincidentally, I was just talking to a client with a strong patent portfolio and was explaining that for IV, a patent is just an asset that, when acquired, fulfills their business strategy. They have a number and if your number doesn't match their number, they will pass because there will be any number of patents offered to them in coming weeks. What IV does so well is taking the emotion and uniqueness out of patent assets. We would all be well served to become more objective about patents and the patent system in general.

Andrew Robinson said...

Patent law, like any other legal system is designed to encourage certain behaviours and discourage others. While it's possible to come up with any number of reasons for the existence of patent law, I think encouraging the existence of NPEs did not feature in the minds of the legislators who passed the laws, and I would be surprised if any of them can be proved to have anticipated their existence. I believe NPEs are an unexpected byproduct of patent law, and therefore their existence should be questioned.

While you could make a case that NPEs provide a market for individuals with great ideas but no capital to monetise their creativity, but I doubt the figures would reveal many transactions like that went into the Intellectual Ventures portfolio.

I would welcome some independent research into the economic impact of NPEs to help legislators decide if they are an unwelcome byproduct of a badly drafted law, or if they are an unexpected economic benefit from a law that had implications beyond it's original intention.

The interesting thing for me is that we do already have a set of laws that could be used to stamp out patent trolls, if we decide this is needed. Laws against monopoly abuse exist to stop companies in a monopoly position leveraging that monopoly to gain additional monopolies – which pretty much defines Intellectual Ventures' business model. Historically, IP monopolies have been exempt from the laws governing monopoly abuse, but perhaps it is time to question if this this exemption should continue to apply to patent-holding NPEs, or even to patents as a whole?

Pedro Malaquias said...

Great article.

Markus said...

We could also see the whole issue sociologically. Patents confer status to a person or entity which tries to become an innovator in a certain technological area.

When an entity has no story to tell and seeks no place in a status order, it will always be an outsider, no matter how well it performs.

Anonymous said...

The writer says 'It is not this Kat's intention to enter into the general debate about Intellectual Ventures' and then goes on to give comments in a very one-sided way, essentially asking 'if Intellectual Ventures, or any other NPE, is exercising its patent right in a lawful way, why should the purposes and rationale of the patent system matter?'. However I think if you want to ask the 'big questions' in your article about NPE's (which the second half of the article does) then you do need a give a more balance set of facts to begin with. This is a great article, but it does need to give more of the other side of the story. There is a much quoted figure of $29bn as the cost to US companies of patent trolls in 2011. That's a lot of money, and shows how much of a burden they really are. In addition I think one cannot simply judge the right and wrongs by asking whether their activities are lawful. The concepts and principles behind the patent system do need to be considered. The patent system is there ultimately to enhance economic activity, and I think most people would argue that NPE's do not ultimately enhance economic activity.

Neil Wilkof said...

Dear Anonymous

Thank you for comments about the costs attributed to patent trolls. In that vein, I would also draw attention of readers to the following articles:

1. Tom Ewing and Robin Feldman, "The Giants Among Us", 2012 Stanford Technology Law Review

http://stlr.stanford.edu/pdf/feldman-giants-among-us.pdf

2. Sara Jeruss, Robin Feldman, Joshua Walker, "The American Invents Act 500: Effects of Patent Monetization Entities on US Litigation", 11 Duke Law & Technology Review 357, 2012; UC Hastings Research Paper No. 3

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2158455

Neil

Eric said...

A has a patent. B is a manufacturer who makes products which might infringe A's patent.
Scenario 1: A is a manufacturer of products under the patent. B might have a patent relevant to A's products and A does not solely depend on licencing income. Result: A may feel restrained from suing B.
Scenario 2: A is a university. A may be interested in licensing income, but is not wholly dependent on it. Result: Perhaps some incentive but no overwhelming necessity to sue B.
Scenario 3: A is a patent troll. A relies 100% on its licensing income. A can decide to sue B without fear of a countersuit under one of B's patents. Result: Suing is amost compulsory (licenses are the only source of income) and almost without risk.
Who creates the greates imbalance in the system?

Anonymous said...

Eric, how about scenario 4.

A is a major patent holder and manufacturer in the field and requires a rapid influx of cash. In order to achieve this, A sells the patents to C, a NPE, for a tidy sum, thereby providing A with the cash necessary to develop new products.

Joe Wyse said...

My opinion is that NPE's do not join the ranks of the unacceptable face of capitalism :

Unlike the financial systems and banks, NPE's have not brought the nation states of the west to their knees by conspiratorial, predatory and dishonest behaviours and then exacted tribute from their taxpaying victims, nor is the raw material of their trade, knowledge creation, a zero sum game, which is usually the case with real estate or commodities.

Knowledge creation is inexhaustible; smart people or companies who don't wish to license from the NPE can come up with ideas rendering the NPE patents obsolete or less valuable than the NPE had first thought. On the other hand, the NPE can recognise and attribute value to a patent asset which otherwise would be rendered useless to it's original owners.

TJ said...

@Joe - well said. But even if it were a zero-sum game, I still don't see there's much of a problem. If I buy a farm, I can choose to farm it myself, or I can rent it to tenant farmers. Either way, it's perfectly reasonable that I can evict any squatters who decide to occupy my land. Even if I decided to erect fences round the land and leave it to become a wilderness, I should still be able to evict squatters. Perhaps there's a slight moral argument towards forcing me to let the land on reasonable terms if I'm otherwise going to leave it unexploited, but I can't see that whether I'm farming it myself makes the slightest bit of difference to anything.

Anonymous said...

Intellectual Ventures is a very controversial company. This article from IP Watchdog is a little bit old, but gives another side of the story: http://www.ipwatchdog.com/2010/12/20/intellectual-ventures-independence-day-take-ii/id=13876/

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