Patent enforcement companies speak at SF conference

Earlier this month, MDB Capital Group--an IP-focused investment bank that promises to help investors understand "the hidden value of intellectual property assets and future technological leadership"--held what it billed as its first annual "Bright Lights" intellectual property conference, bringing together IP-centric speakers from a variety of small and medium-size companies.

The Prior Art attended the opening panel, which included the heads of two of the largest, and most litigious, patent-holding companies—Erich Spangenberg and Paul Ryan, the CEO of Acacia Research Corp., the largest publicly traded patent-licensing company.

The panel also included representatives from consultancy ipCapital Group and RPX Corp., which buys litigated patents in order to strike deals between NPEs and operating companies, as well as IP guru Marshall Phelps. (Phelps is something of a legend for building IBM's legendary $2 billion patent-licensing operation; most recently, he helped Microsoft build up a patent-licensing operation before leaving the company last year.)

The most interesting part of the opening session came when Spangenberg and Ryan explained how their businesses work and and how they are changing.

THE SPANGENBERG STRATEGY
During the panelist introductions, Spangenberg gave a brief description of his businesses—an IP consultancy called IP Navigation Group, combined with a a very large network of patent-holding companies, several of which are named after Greek gods. According to patent defense company PatentFreedom, entities connected to Spangenberg have sued more than 500 companies for patent infringement since 2005.

Spangenberg recounted to the audience about how he first learned of the patent-assertion business. He was working at Jones Day at the time, he said, and one of the firm's clients had been hit with a patent suit by Ronald Katz's patent-holding company.

Spangenberg said that when he met Katz to discuss the lawsuit, he was immediately impressed by his adversary's office. "It was like walking into Versailles," Spangenberg said. Soon after that encounter Spangenberg left Jones Day to get into the patent-monetizing business himself. His first move: buying Firepond, a small Minnesota software company that had fallen on hard times. By the time Spangenberg showed up, all the company had in its possession, he said, were "some really cool chairs, some flat screen TVs, and patents." That didn't faze him at all.  "We started an aggressive licensing program."

At one point during the seminar, the moderator asked Spangenberg a question about how he approaches companies to whom he wants to license his patents. "Do you initiate contact with them or just file a lawsuit?"

"File a lawsuit," said Spangenberg without hesitation, explaining why that, to him, is the best strategy in the post-MedImmune environment. "If you send a message, shortly thereafter you'll see a notice that you're a defendant in a declaratory judgment action, typically from Fish & Richardson or one of their other favored firms... Microsoft sues you based on that letter. Then they have the home field advantage."

He added: "I'm not criticizing them for doing it. I'm just saying, that's what's going to happen."

Acacia CEO Paul Ryan agreed that the Spangenberg's strategy is the only smart one a patent licensor can pursue these days. "If you're a small company, any offer of IP [to a large company] gives them an invitation to sue you."

Next, Spangenberg talked venue. Stanford Law Professor Mark Lemley recently published a study that found that the most successful courtrooms for patent holders were in some unexpected places—namely, that while the Eastern District of Texas is considered the most plaintiff-friendly in the country when it comes to patent infringement cases,  patent-holders actually fare better in several other districts, especially the Middle District of Florida.

But Spangenberg, who sues almost exclusively in East Texas, didn't make it sound as though Lemley's findings would send him running to other districts anytime soon. Patent-holder win rates might be great in the Middle District of Florida, but at the end of the day, he suggested, verdict size is what matters most. "Unfortunately you have a buch of retirees [on Florida juries], so your award is going to be around a couple hundred grand," he said. That's not nearly enough to cover the legal costs of a patent suit that can typically run to a few million dollars when a case goes to trial.

THE ACACIA ANSWER
Acacia Research Corp. CEO Paul Ryan moved through his talking points with the rested confidence of a man whose company had just seen its best quarter yet. Even though it still isn't profitable (a point he did not make to the audience), Wall Street is clearly feeling better about the company's long-term prospects. Acacia's stock price has returned to levels it hasn't seen since 2007, and, Ryan said, the company has now settled lawsuits with 770 defendants since its 2002 launch.

Among the more interesting nuggets Ryan offered up: First, the company's business model is shifting. "We started with [patents from] individual inventors," he said. "But what we've started to see in the last year is major multinational companies" talking to Acacia about monetizing their patents. Those companies have "much larger portfolios, with much deeper and higher quality patents."

"The response from large companies is changing. At first they didn't want to see us flourish," Ryan said. Now, some companies are willing to sign non-disclosure agreements that allow for negotiating long-term patent license rights with Acacia.  

After seeing Acacia repeatedly as an opponent in court, some companies are learning that "a better approach is to be a customer" of Acacia, said Ryan. They're doing that by signing up for broad licenses that cover many portfolios of Acacia patents—and future ones that the holding company might acquire—rather than just settling individual
suits as they arise.

Acacia has always been a company to which patent-holders can "outsource" the work of licensing and litigation, in exchange for a cut of the revenue; but now it isn't just individual inventors with the odd patent or two that want to partner up with the California patent-holding company. Ryan said he's had discussions with major companies interested in potentially working with Acacia to assert their own patents (Ryan didn't provide names). "Large companies want to see a return on their R&D just like other companies do," he said.

Ryan also offered his take on recent Supreme Court jurisprudence on patents. "I think the last five Supreme Court [patent] decisions do lessen ownership rights," he said. "The weakening of patent rights in general is bad for the country."

One thing Ryan didn't mention: While the new limits the Supreme Court has placed on patent rights hasn't been good for Acacia's bottom line, Acacia's poor performance in court—losing three out of the four patent cases it has seen through to trial—surely hasn't helped either.  

PATENT REFORM SKEPTICS
In response to a question about pending patent reform legislation, Spangenberg said: "I assume it will pass, basically by the end of the year. I don't think it will have a big impact on the market." (Some of the more controversial provisions originally contained in the proposed legislation--including one that would sharply limit damages in patent cases--have been abandoned.)

Marshall Phelps agreed with Spangenberg that legislative reforms won't have a big impact on the business of patent litigation. "One of the reasons I don't think it will amount to anything is that the Supreme Court has entered into this discussion about ownership rights," he said. The atmosphere around these issues on Capitol Hill is improving, he added, because the two big lobbying interests on opposite sides of the debate have toned down their rhetoric.  "Now, pharma and tech can have a discussion in the same room," he said. "Three years ago—they couldn't."

TOWARD A PUBLIC PATENT MARKETPLACE?
Spangenberg also expounded on a theory he's shared with The Prior Art before—that patent transactions will ultimately become much more "liquid," creating a marketplace more like those in which physical assets are bought and sold. That would allow patent-holders and NPEs to continue to make big profits, while also lowering the cost to operating companies, by reducing their ever-growing expenditures on lawyers.

"As this market develops, it will become transactional," Spangenberg explained. "And I can't wait. It will be like a real estate deal. Twenty years ago you needed a lawyer at the closing—today you don't."

Micron just spun off a huge portfolio to former Kirkland & Ellis litigator John Desmarais, noted Spangenberg. Ryan agreed that was a significant development, adding: "We think that's going to happen with increasing frequency."

While Phelps might be thought of as being on the "other side" compared to Ryan and Spangenberg when it comes to the patent business, he didn't come off as hostile to the holding companies in any way. In fact, The Prior Art got the sense at the talk that the NPE business—whether you're a patent expert at a big company, a patent-holding company, or a service provider like RPX—is largely one happy, and well-remunerated, family.

Still, when it came to the issue of a patent marketplace, Phelps threw some cold water on Ryan and Spangenberg's hope for a more something akin to a real-estate asset-type marketplace.

"I'm one of those people who's kind of skeptical about whether there will be public marketplaces for patents," said Phelps. "There's been a failure of another profession here, and that's the accounting profession," he said. (By "another," Phelps meant, in addition to the legal profession.) "It's a dysfunctional marketplace. They're are scared to death. They don't know how to value [IP] and they're going to get their socks sued off if they value it wrong."

Spangenberg smiled at Phelps's critique of his rosy IP-market scenario. "I'm a bit more optimistic on the transactional side." But he did take the point. "At the end of the day, valuation of IP will remain an inexact science."

Photo: flickr / jnpoulos

Comments

[neuraloverload]

Hopefully the Supreme Court will wake up to itself and kill off the software patents that are strangling innovation in the industry.
Copyright on software is all that is needed.
Not inexact patents that can claim to own mathematical functions.
The sooner these paten troll companies die off, the better.

[Scott Dunn]

After reading the Ariad v Lilly ruling, I think it would be a good start to limit the claimed invention to just the written description. Ariad was claiming the rights to "any and all compounds" that could reduce genetic expression. Forcing patentees to be very specific about the invention rather than using broad "idea" language would go a long way towards reducing the hostility towards patents in general.

Maybe then the value of patents would outweigh their social costs.

[Gena777]

I appreciate the comments regarding the "patent reform" legislation currently before Congress. Legislative deal-making tends to take the teeth out of any real efforts to reform the system. Patent law needs true reform, but it looks like we'll have to wait a while longer before that's forthcoming:
http://www.washingtontimes.com/news/2010/may/25/patent-reform-misses-the-mark/

[John]

Intellectual Property

What an oxymoron anyway!