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Patent exchange

The monetisation of patents as income-producing commodities is here to stay. This begs the following questions: what business models do the owners of patents implement; and how can patents be traded most effectively?

June 2014

Patent trolling has, of course, been the subject of much discussion in recent years. At its most basic, patent assertion companies, having no business in the expensive matter of innovation, buy up patents and then seek to extract licence fees from companies selling technology rich products (such as in the mobile phone market or in gaming) where parts of their products are said to be covered by  the claims of the asserted patent.  The choice is to pay the licence fees or to enter into expensive patent litigation to prove the invalidity and/or non-infringement of the patent being asserted. This has proved more than irksome to many technology companies, where they are faced with weak patents which ought never have been granted, and where the Non-Practising Entities (NPEs) benefitting from the licence fees are adding nothing in terms of technology or further investment in innovation.

monitoring chartAs a counter to trolling, patent aggregators (such as RTX) buy up patents from the market place which could become problematic to their members if they were to come into the hands of NPEs. Membership fees from their members enable the patent aggregators to take patents off the market and, in addition, the patents are also not asserted against third parties.

Innovator companies who are in the business of manufacturing products, are also in the business of buying patents to improve their portfolio and their negotiating strength in cross-licensing deals.  Such technology companies have also banded together to buy portfolios to keep them out of the hands of competitors who would seek licence fees/assert those patents against them. For example, the Rockstar consortium (made up of Microsoft, Apple, Ericsson, BlackBerry and Sony) bought the Nortel patent portfolio for USD4.5bn in 2011, outbidding Google and subsequently asserting some of those patents against Google and Android manufacturers.

The financial sense in the monetisation of patents as part of a business model is clear, however, the market in which patents are traded is far from being a transparent one.  The market value of a patent portfolio is not necessarily easily determined by the patent holder or a potential buyer or licensee. Deals are often done directly between two parties or done through patent brokers (the arms dealers of the business) without the sums paid necessarily becoming public. Sums paid for the purchase of very large patent portfolios, such as Nortel's, have seen the light of day in press releases but, for the most part, deals are done privately.

Commodities and financial instruments are listed on exchanges as a matter of course but it remains to be seen in the advent of intellectual property exchanges, whether these will  take off. Patent rights traded on an intellectual property exchange have transparency in terms of the price at which they are being offered although that price is necessarily commoditised.  On the recently launched Intellectual Property Exchange International (IPXI) which includes an electronic trading platform for use by its members, offers of licences under patent portfolios are listed as Unit Licence Right (ULRTM) contracts.  The purchaser of the contract is given a non-exclusive licence, for example, to manufacture and/or sell a certain number of pre-defined products incorporating the patented technology.  The manufacture and/or sale of any more pre-defined products would require another contract. Under a current offering on IPXI, OLED (Organic Light Emitting Diode) Display ULRTM contracts for licences of a patent portfolio held by Philips are offered by reference to the number of square metres of display manufactured and/or sold. This currently stands at USD36 per five square meters of display.

drawn chart increasingFinancial exchanges for intellectual property clearly have advantages for patent holders in some circumstances, allowing a patentee to seek to recoup the R&D spend on its innovation by putting that technology out to market. That may be so particularly where those patents cover technology which is not central to its core products or where its patents are relevant not only to its own product line but also to products in a different arena in which it does not manufacture.  As such, it is expected that there will be some growth in the use of patent exchanges although these will sit alongside the existing more opaque brokered deals.

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passing a baton

"It is expected that there will be some growth in the use of patent exchanges although these will sit alongside the existing more opaque brokered deals."