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Historically, few corporate executives have paid much attention to management of their company’s intellectual property (“IP”) portfolio and/or IP litigation exposure. However, given the rise of an increasing number–and continually evolving structures–of non-practicing entities (“NPEs”), intellectual property issues are starting to gain visibility to corporate executives. Specifically, IP monetization and defensive patent aggregation services have spawned new businesses to cater to operating companies.
The latest news in the IP world was ICAP‘s spring 2011 auction, where a covenant not to sue was sold for $38.5 million. The first of its kind ever to be transacted at auction, Round Rock Research’s covenant not to sue presents a new avenue for NPEs to monetize their IP, and potentially new challenges and opportunities for corporate executives. The covenant not to sue grants its purchaser the right to operate under a portfolio of patents owned by the seller spanning several industries.
There are two primary reasons operating companies acquire and hold intellectual property rights. First, as a defensive measure–by holding large portfolios of IP, corporations can thwart potential lawsuits by the looming threat of a countersuit. Second, IP portfolios are held to cover and protect vital business operations. While these goals used to be much more modest, the emergence of NPEs (also known as “trolls”) has complicated the IP landscape.
NPEs strategically acquire certain patents (or have patented technology) for the purpose of enforcing their rights and deriving significant revenue by suing operating companies. Because these companies typically do not have any business operations, the threat of a counter-suit is moot. Therefore, the existence of trolls makes the goal of protecting vital business operations even more difficult for operating companies by eliminating the counter-suit safeguard and increasing the chance of being sued.
The creation of IP auctions have arguably made it easier for trolls to acquire key patents, but have also presented an opportunity for operating companies to defensively purchase any patents which may be asserted against them. Ocean Tomo, LLC began auctioning intellectual property in 2006 and continued to do so until selling its transactions business to ICAP in 2009. While several other auctions have been attempted, none of them have had the success of those run by Ocean Tomo and ICAP. The recent groundbreaking sale of a covenant not to sue at ICAP’s spring 2011 auction presents yet another new opportunity for trolls to assert themselves, and also a new opportunity for operating companies to protect themselves ex ante.
There have been other examples of innovation in the IP space. For example, in response to the development of trolls, innovative companies are devising ways to protect operating companies from patent litigation exposure. One such company is RPX Corporation, offering its client network defensive buying services, acquisition syndication and advisory services. As other companies continue to develop risk management solutions for operating companies, the struggle between operating companies and trolls will likely continue and it will be interesting to see who is best able to exploit the changing IP landscape. IP auctions present a unique opportunity for innovation and it is anybody’s guess as to the next IP evolution.
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