Xerox has announced a delay in its auction of 239 patents, planned for July 24-29, citing “numerous requests” from potential bidders for additional time. The company also increased the number of patents to 546. While a skeptic may claim the delay is really due to a lack of interest, I think it’s more likely that there’s a great deal of genuine interest – but the interested parties are struggling to determine exactly how much they should bid. Patent valuation is always part science, part (prior) art, and never easy.
According to numerous reports, these Xerox patents, which “came out of research work at its various global R&D centres”, are to be auctioned in lots valued at between $1 million and $10 million each. The auction web site suggests initial bids for each lot, ranging from “low six figures” to “low seven figures”. There are 27 lots covering technology fields such as audio communication, touchscreens, image compression, networking, and print systems. This means that Xerox is hoping to rake in between $27 million and $270 million. Even at the low end of the range, that’s not chicken feed.
The bidders have to weigh the up-front purchase cost ($27 million plus, in this example) against what they reasonably believe they can obtain in licensing fees from operating companies that are infringing the patents – and that do not already have a license from Xerox.
Naturally, it’s essential for the bidders to scrutinize the patents to confirm that they are well drafted, and not likely to be overturned by an invalidity challenge. Furthermore, they’ll want to look very carefully for evidence of use of these patents in the products of prospective licensees. A diligent licensing company does not want to skimp on either step, regardless of the seller’s timetable.
Now, the corollary is that this analysis can end quickly if the patents are not of high quality. Mark Peterson, CEO of Robinwood Consulting, has expressed doubt that the patents are particularly good. But I believe this delay proves the opposite. A rigorous valuation can take weeks or months, depending on the breadth of the portfolio. Xerox’s original schedule gave less than four weeks. The extension to September 11-16 is much more realistic; it could even be extended again – we’ll see.
Selling excess patents is good business
What’s notable about patent sales from major companies is the huge range of values, such as Kodak’s (at a disappointing $94 million) and Nortel’s (at an eye-popping $4.5 billion). But unlike Kodak and Nortel, Xerox is not bankrupt. Why would a profitable company like Xerox be selling its patents? First of all, these 546 patents represent only 4% of the approximately 12,000 patents owned by Xerox. This sale is better understood as an act of responsible asset management than one of desperation.
Senior management at many public companies are learning that their fiduciary responsibility includes proper use of patent assets. This is leading companies to look for licensing opportunities – by starting their own licensing programs or in partnerships with companies such as Conversant – or the outright sale of parts of their patent portfolio.
In fact, Xerox has sold patents in the past, although this is their first auction. They will doubtless continue to do so in the future, just as its engineers will continue to file patents on new inventions – currently at a rate of about 1,000 per year. A functioning secondary market for patents, and a strong legal framework for their enforcement, ensures that companies will be able to generate additional returns on their R&D investment, even for inventions which they do not themselves practice.
We’ve all heard of the apocryphal art gallery visitor who confidently asserted, “I don’t know if it’s art, but I know what I like.” When it comes to patent licensing, the prevailing mood seems to be, “I don’t know what a patent troll is, but I know what I hate.” The Congress, several dozen state legislatures, and even the President of the United States are wrestling with the “troll problem”, untroubled that there is no consensus or precise definition of what a troll is or exactly what they do.
Worse than trying to solve the wrong problem is denying that there is one. Yet too many in the patent licensing industry continue to hew to the “what troll problem?” position. This is clearly folly. The world is convinced that something is wrong, and is ready to [over] react. It’s no good pretending that the patent licensing industry can continue as it has for the past two centuries. Bad actors have crept in, and they run a very real risk of damaging the innovation engine of our economy. We should also give up complaining about the label “troll”. It’s marvellously evocative and firmly entrenched. Once we agree to apply this name to the true bad actors, we can concentrate on answering the question, “What is a patent troll?”
In an article in TechCrunch, Leonid Kravets of InterDigital Communications Inc. wrote that what makes a company a troll is not whether it practices the invention itself, or whether they filed the patents themselves, but whether they are “abusing” the system. Quite so. Kravets identifies low quality patents and “enforcement without a reasonable basis for assertion” as the hallmark of an abuser of the patent system – a troll. Yet this falls short of identifying what is probably the most widely agreed upon characteristic of a troll: the assertion of a patent to force a quick, nuisance-value settlement, ideally without the expense of a trial.
Many other elements of trollish behaviour flow from this basic strategy. If you’re only hoping to collect a few thousand dollars from each licensee, you’re going to need a lot of them make serious money. So a troll will place a lot of companies on notice. The corollary is that a troll cannot simply target manufacturers (e.g., of Wi-Fi chips, such as Broadcom, or of wireless access points, such as D-Link) but must descend to the bottom of the value chain, and target the product company’s individual customers, whether small companies or even individuals. For example, Innovatio IP Ventures has made a practice of suing hotels for patent infringement.
Now, if you’re a big scary troll, you need a club to intimidate people. But an extensive collection of cudgels, maces, warhammers, and goupillons actually provides little additional benefit. This is particularly true if you are a cowardly troll who prefers intimidation to combat. And because those weapons are expensive to buy and maintain, you’d actually prefer not to have too many. This brings us to the second hallmark of a troll: they own and assert a very limited number of patents – sometimes as few as one.
These two characteristics probably apply to every troll out there: They seek nuisance-value settlements for a small number of asserted patents. But there are other telltale behaviours and signs that should factor into our evolving definition of a patent troll.
Trolls are unwilling or unable to clearly identify the supposed infringement. This can be attributed to a desire to cast as wide and threatening a net as possible, but is also an unavoidable side effect of sending hundreds of notice letters: you can’t put a lot of effort into any single assertion.
A particularly aggressive species of troll will sue first and hold discussions later. This is attributable to two root causes: a desire to intimidate (a lawsuit is scarier than a demand letter) and a need to cast a wide net (with many targets in the crosshairs, one cannot spend a lot of time talking to each).
In addition, a troll often hides behind a smokescreen of shell companies and obscurely named subsidiaries, partly to conceal the widespread nature of its activities. This is sometimes an unavoidable consequence of the structure of the business deal which lay behind the sale of the patents, and should not be considered irrefutable proof of a troll.
Finally, there’s the notion of patent quality, which is referred to not only in Conversant’s Patent Licensing Principles, but also by Kravets and many others. A troll doesn’t really care about the quality of the patents. Even a low quality patent, certain not to survive re-exam, can be sufficient to frighten the recipient of a demand letter into paying. Poor quality patents are doubtless a problem for the entire patent system, but in my opinion are a red herring in this context. If it were easy to agree that a given patent is over-broad, or even invalid, the troll would obviously be toothless. Patent quality can only be proven by a time-consuming review; we’d like to spot trolls ahead of time. (Also, the review process is only a little less fallible than the original filing process. What were widely believed to be solid patents can founder.) Thus, using patent quality to identify a troll can at best be applied only retroactively, and thus is of limited use.
So here’s our seven-point guide to spotting a patent troll:
1. Seeks nuisance-value settlements
2. Targets individual customers or end-users
3. Owns and asserts a very limited number of patents
4. Unable/unwilling to clearly identify infringement
5. Sues first and holds discussions later
6. Hides behind shell companies and subsidiaries
7. Asserts poor quality patents.
The next time you hear someone accuse a company of being a troll, it may be instructive to see how it measures up against this list. But to return to the point made earlier, it may be that worrying about an exact definition is a distraction. What we really want is ways to make it harder for them to operate.
Adam Carolla, one of the most popular podcasters in the U.S., is sued by a patent troll. The story goes viral. Across the country, state Attorneys General are using consumer protection laws to guard their small businesses from the predacious patent trolls. And here’s something previously unthinkable: the President of the United States, in the 2014 State of the Union address (“It’s the country’s most valuable political real estate,” noted one D.C. veteran), urged Congress to “pass a patent reform bill that allows our businesses to stay focused on innovation, not costly and needless litigation.” Our industry is under fire.
Yet former USPTO director David Kappos has described the U.S. patent system as “our country’s investment plan – a giant 401k through which we pay a little extra now form more great innovations in the future.” As a vital guarantor of our nation’s future, the patent system certainly warrants that description. Let’s not forfeit our future by allowing patent trolls to corrupt it today.
So what are our politicians doing about the issue? They are listening… and acting.
The National Federation of Independent Businesses (NFIB) and many other retail business groups and trade associations have demanded that the government act. Washington is listening. Only several years ago, very few members of Congress ever gave any thought at all to patent issues. Today, anti-patent sentiment is rampant and Congress seems determined to enact some sort of anti-troll legislation, having been besieged over the last couple of years by thousands of very angry Main Street constituents to do something.
In December 2013, the House of Representatives easily passed the Innovation Act. This act targeted the use of shell companies, required greater details about infringement allegations, and included a “loser pays” provision. However, the Senate’s companion bill, the Patent Transparency and Improvements Act, stalled repeatedly and was ultimately withdrawn by Senator Patrick Leahy (D-Vermont) owing to justifiable concerns that it would have severe unintended consequences on legitimate patent holders.
The enthusiasm for new laws curbing patent trolls hasn’t waned. In June 2014, only two weeks after Sen. Leahy withdrew his bill, the House of Representatives launched another attempt. Rep. Lee Terry (R-Nebraska) unveiled a draft demand letter bill that would clarify the power of the Federal Trade Commission (FTC) and state Attorneys General to regulate patent demand letters sent in bad faith. The bill is winning broad support.
At the state level, meanwhile, a dozen states have already enacted laws to curb abusive patent demand letters, and 14 other states are actively considering legislation to do the same. In addition, the Attorneys General of several states have brought suit against trolls who send these letters using existing consumer protection laws against making false claims to extort money.
One of the most successful suits took place in New York, where in January 2014 state Attorney General Eric Schneiderman forced MPHJ Technologies, LLC to sign a consent decree requiring it to repay all the money it received from businesses in the state. MPHJ, using various shell companies, had falsely claimed in demand letters it sent to businesses that it had analyzed each target company’s scanning systems and determined these to be in violation of its patents. In fact, MPHJ had merely sent form letters to hundreds of companies of a certain size and industry classification without investigating or uncovering any evidence whatsoever of infringement.
What is this if not outright extortion? This is what so many ordinary citizens and small business owners are so furious – and with good reason.
If they know history, they will be wondering, “Where is the patent system of Thomas Edison? What happened to a patent system that helped transform a largely agrarian United States in the 19th century into the global leader of the Industrial Revolution, and in the 20th and 21st centuries, into the world’s most prosperous and economically powerful nation?
Have patent trolls now turned it into little more than a protection racket and a tax on small businesses?
As an industry and as professionals, we should forthrightly condemn the practices of bad actors that are victimizing the innocent– just as responsible members of other industries condemn the predatory practices of bad actors in their fields. Then we must do our part to root them out. Only by doing so can we revitalize and reaffirm the demonstrable truth that the American patent system plays a vitally important role in the innovative process and the economic strength we all enjoy.
But instead, many in our industry sit silently on their hands, fearful of getting embroiled in controversy or of giving opponents of the patent system more ammunition with which to criticize and attack it. At the recent Global IPBC industry conference in Amsterdam, many speakers condemned patent trolls, yet no action plans were proposed. Some licensors even continue to write about “the so-called” patent troll problem, as if thousands of small business victims were somehow merely imagining it all. Denial should not be tolerated in our industry.
That’s why we’ve launched a “Stand Up to the Demand” campaign designed to help small businesses identify and respond to extortionist patent demand letters. The first phase of our campaign features a web site with an infographic quiz that helps business owners distinguish a bad demand letter from a legitimate notice letter, and view sample demand and notice letters as well as a video. We’re inviting the public to share their stories of how they are dealing with patent trolls. We’re also linking to other resources, such as the website, operated by the U.S. Patent and Trademark Office (USPTO), that’s designed to offer advice to small businesses that believe they have been the victims of abusive demand letters. And there’s a link to a free web-based tool launched by RPX, a provider of patent risk management solutions, that helps small business owners research the background and litigation history of the senders of demand letters, to the extent these are known.
To access the resources, visit www.standuptodemand.com.
The greatest long-term threat to the U.S. patent system does not come from its professional opponents – those large businesses and their political allies who stand to profit from enfeebled patent rights. A deeper harm is caused by unscrupulous patent trolls who use extortionist “demand letters” to victimize small businesses. This practice, we believe, is wrecking public confidence in the U.S. patent system – and by extension, profoundly weakening the bedrock belief in the great economic benefits conferred by patent-protected inventions.
Yet even as damage caused by demand letters spreads, most legitimate patent licensors whose businesses depend upon continued legislative and public trust stand idly by, doing little or nothing to address it. Well-insulated within the patent industry’s cozy professional bubble, we are, in effect, fiddling like a modern-day Nero while innovation’s Rome burns.
Why the disconnect? Most people in the patent licensing industry understand that patent troll demand letters are a significant economic problem for U.S. small business community, costing millions of dollars in settlement fees and legal costs annually. What’s not grasped is that phony demand letters are an even greater political problem for our industry and for the patent system as a whole. Let’s quickly review the problem.
Patent trolls, typically operating through shell companies, send form letters to dozens, hundreds, or even thousands of apparently random small businesses at a time, claiming with little or no evidence that they are “infringing” the troll’s patents. The senders demand so-called “licensing fees” ranging from $1,000 to $50,000 or more (depending on the size of the business) to avoid a patent infringement lawsuit that could cost these businesses far more to defend against in court – even if the business owner is innocent of any infringement.
It’s true that comprehensive, nationwide data on the extent of the demand letter problem and its economic impact is hard to come by or doesn’t exist. But there is mounting anecdotal evidence that the deluge of demand letters is at the very least harming one of the nation’s most critical job creation sectors, small businesses and startup companies. The reported impact usually takes the form of hiring delays, reduced R&D spending, or a negative change in product or business strategy. One study reported that 70 percent of 200 venture capitalists surveyed had invested in startup companies that later received extortionist demand letters.
Simply looking at the aggregate economic impact of patent troll demand letters, however, or advocating for more study of the issue before acting, misses their fundamental emotional impact – the intense popular rage that they generate. To understand that, you’ve got to put yourself in the shoes of a small business owner who is victimized by a patent troll.
At Conversant, we believe it’s time to step up and help deal with the scourge of patent troll demand letters. So we’ve launched a “Stand Up to the Demand” campaign designed to help small businesses identify and respond to extortionist patent demand letters. We’re not doing this for practical business gain, because small businesses are not our partners or licensees. Rather, we have launched this campaign because it’s the right thing to do, and we hope it will help restore public trust in our industry and in our patent system as a national engine of economic progress and competitiveness.
To learn about it and help us advocate against patent trolls, visit www.standuptodemand.com.
2014 IP Investments & Markets town hall meeting was held on June 17-18 in Chicago, Illinois. The conference was hosted by the non-profit Center for Applied Innovation, with Ocean Tomo LLC as the presenting sponsor. TechNexus, a venture collaborative located on the 12th floor of the Opera House Building, was the venue provider.
With attendance restricted to about 100 delegates, the conference was divided into three sections: Early Stage/Venture Investment; a “Town Hall” Meeting on IP markets; and IP investments and debt.
The organizers invited speakers from across the IP industry value chain. The diagram created below groups the corporate logos of the keynote speakers and panel participants in the meeting under five value-chain headings:
During the townhall meeting, the keynote session speakers and panels participants – primarily executives and CEOs from different segments of the IP industry – often described the current state of the IP industry as “heavily litigious,” “inefficient,” “opaque,” “in turmoil,” and “undermanaged.” In contrast to these negative adjectives, the positive words used were “untapped” and “opportunities.”
After participating in the two-day town hall meeting, it was very clear that the IP industry is at a crossroads. Due to the challenges faced with valuing patents, difficulties are experienced by stakeholders across the IP value chain. Patent monetization, more often than not, goes through the courts, costing millions of dollars and taking several years. Companies that own high-quality patents are faced with the underutilization of their IP assets since it is hard to leverage their patents to optimize their financing costs.
In a keynote speech, Marshall Phelps, CEO of Article One Partners and former head of IP at IBM and Microsoft, advocated four solutions to the issues facing the industry:
- Focus relentlessly on patent quality
- Fix the US Congress’ recapture of fees that are coming from the USPTO
- Fix our “industrial age” accounting systems to better capture IP assets
- We ourselves have to change – stop demeaning the efforts of the other companies in the industry. Patents and IP have to again ally with words such as “invention” and “innovation” instead of “litigation.”
Implementing any of these four recommendations would certainly help industry take a big stride in the right direction. At the same time, improvements of this magnitude will certainly require extensive amounts of time, money and collaboration by stakeholders across the industry.
Since joining the IP industry almost eight years ago, I have been blessed with working with many talented individuals with exceptional abilities. Let’s hope the talents in the industry will all work together so that I can update everybody on all the positive progress the industry has made after next year’s town hall meeting.