IPXI: Creating an Efficient Patent License Marketplace

By Chase Means[*]

Intellectual property is considered by some to be the largest asset class in the world.  Intellectual property assets in the United States were recently estimated at $5.5 trillion.[1]  Despite this huge estimate of intellectual property assets, not all of these assets are being effectively utilized.  In fact, in the United States alone, it is estimated that “a staggering $1 trillion” is wasted in underutilized patent assets.[2]  In order to help exploit some of these unused resources, a new exchange called the Intellectual Property Exchange International, Inc. (IPXI) has been created.[3]  The basis of IPXI is to allow IP owners to list their IP on an open market where licenses can be bought and sold freely.

I. How IP Owners Have Exploited Their Assets in the Past

Prior to the creation of IPXI, there were several ways one could take advantage of IP assets through licensing.  The most traditional methods were bilateral licenses and compelling a license through court proceedings.  These options have certain challenges or weaknesses that IPXI attempts to remedy.[4]

A. Bilateral Negotiations for a License

Negotiating a license with a potential licensor is one of the most common ways IP licenses come about.  Generally this requires a company to identify a particular potential licensor and negotiate a license with it.  This can be difficult or troublesome for several reasons.  First, corporations often discover potential licensors by identifying potential infringers of their IP.  It is often not easy to negotiate a license with an entity that feels accused of appropriating IP.  Second, there are numerous steps involved for an entity that seeks to enter into a bilateral license.  When seeking a license, negotiating with every potential infringer takes significant time and effort.[5]  This increases transaction costs from a hypothetical market-based scenario where anyone could take licenses at a market-determined rate.[6]

B. Compelling Licenses Through Litigation

The next traditional way IP licenses occur is compelling a license through litigation.  There are several issues with this method.  Similar to the first method, the litigation route requires one to sue a single infringer at a time, greatly increasing the amount of effort to get an entire market to respect an IP asset.  Next, litigation has significant risk.  By suing a potential infringer, there is risk of not procuring a license.  Worse still, one may have to take a compulsory license based on any counterclaims from the other party.  Additionally, a court may find that a particular IP asset is invalid and the value of the asset may be lost completely.

Finally, the top reason to avoid seeking a license through litigation is the huge cost of litigation itself.  In 1992 U.S. dollars, the mean cost including trial for a patent suit with $1 to $25 million at stake is $2.10 million.[7]  In addition to the cost of litigation expenses, the opportunity and business costs of participating in litigation can cost parties even more.

II. How IPXI Aims to Help IP Owners Better Monetize Their IP

IPXI’s top goal is to create an open marketplace where buyers and sellers of patent licenses can easily come together to reduce transaction costs and other difficulties present in the current IP licensing market.  It hopes to create an exchange where licenses can be bought and sold in an open market that will remove barriers to trade.

A. ULR Contracts

In order to facilitate a marketplace for patent licenses, IPXI has created a unit license right contract, or ULR contract.[8]  A ULR contract generally consists of a non-exclusive license for a single patent, or several grouped or pooled patents.[9]  In this manner, IPXI intends to list on its exchange patents or groups of patents that most easily facilitate the use of an entire technology or invention, not just of a single patent.

The ULR contract is also different from typical licensing and royalty arrangements.  Traditionally, most royalty arrangements negotiated between two parties agree on a particular royalty rate that should be paid each time the technology is used.  In this arrangement, the licensee pays the licensor the predetermined rate every time the technology is used.  ULR contracts are designed differently.  A ULR contract gives the purchaser the right to use the patent for a future one-time use of the technology.[10]

For example, a telecommunications company may list on the exchange a patent for a particular cell phone technology.  If another company would like to utilize the technology in a cell phone, it must purchase ULR contracts through the exchange.  If the second company wants to make 200,000 cell phones using the technology, it must purchase 200,000 ULR contracts through the exchange.  Each time the company builds one of the cell phones with the patented technology, one of its 200,000 ULR contracts is exhausted.  In this arrangement, each ULR contract is preserved until actually used.  As a result, if the company fails to exhaust all 200,000 ULR contracts it had purchased, it can in turn sell unused ULR contracts on the exchange.  When you have multiple parties buying and selling ULR contracts, something resembling a marketplace for patent licenses can be conceived.  IPXI’s hope is that this will create a robust resale market for ULR contracts.

B. How a ULR Contract Makes It to Market

The first step IPXI has contemplated before listing IP in its exchange is a vetting and valuation process.  IPXI will first internally assess the quality and validity of the IP that is to be listed.[11]  This is an important step because IPXI is likely not interested in listing IP that will not have buyers or IP that could be easily invalidated.  This process will include some evaluation of the potential market for the IP.  It will also include a validity evaluation which can include prior art searches, review of the file history of a patent, and review of the patentability requirements in light of the particular patents at issue.

The next step, pending the IP makes it through the first round of evaluation, is approval by a selection committee.  The idea of the selection committee is to have market or industry leaders sit on this committee and independently assess the viability of the offering.[12]  If the selection committee thinks the IP is worthwhile, the vetting moves on to the next step in the process.

This next phase utilizes external parties to check the IP for validity and value.  This will include valuations and validity determinations.[13]  Also during this phase, the potential listing will be described and publicized for any members of the exchange to comment on.[14]  After a certain period of time to collect comments and perform the further validity and valuation checks, the selection committee will review all the assembled information for a final assessment.[15]

Once the IP is approved for an offering, the IP owner must pay IPXI a fee to fund marketing for the IP and for other activities to make the IP ready for an offering as ULR contracts.[16]  Through this process, IPXI will come up with an “Offering Memorandum” that details what IP will be offered, how many ULR contracts will be offered in the initial offering, and at what price the ULR contracts will be listed.

IPXI has developed a unique approach for auctioning off approved IP, which it hopes will best induce an accurate market price for ULR contracts.  By utilizing an initial offering and subsequent offerings, it hopes to stimulate demand for the ULR contracts and get a more accurate market price for the IP.  Although an asking price for the initial offering will be determined during the approval process, IPXI will conduct the initial offering as an auction.  In this auction there will essentially be a minimum number of ULR contracts that must be sold at a certain price (essentially a reserve price).  “By setting an asking price for ULR contracts and lowering that price until bidders are willing to accept a minimum number of offered ULR contracts, the Dutch auction method determines an initial offering price based on market input.”[17]

Whatever rate the first offering of ULR contracts is sold at, IPXI plans to list the next offerings of ULR contracts at a relatively higher rate.[18]  This is to help stimulate demand during the first offering.  Ideally, this higher price of subsequent offerings of ULR contracts will entice buyers to use the secondary market for procuring ULR contracts.  Additionally, IPXI hopes this will stimulate organizations other than technology producers to buy ULR contracts.  “IPXI contemplates that ULR contract futures and derivative products also will be developed.”[19]  IPXI hopes that this system brings about several advantages over the old methods for licensing.

C. Potential Advantages of IPXI

The transparency and efficiency with which IPXI operates will offer corporate management the opportunity to make better business decisions regarding their IP.  IPXI will offer license rights with standard terms at market-based prices.  As a result, licenses are available to parties that normally wouldn’t have the ability to negotiate a license.[20]  This increases demand for the technology, benefitting the licensor while keeping prices low for the licensee.[21]

IPXI also has the potential to greatly reduce transaction costs associated with previous methods of licensing, such as bilateral licenses.  It also reduces prejudices that may exist within a market between two market players that would impact license terms.  IPXI aims to offer identical terms to any potential licensee in a transparent way, which allows the market of licensees to be larger than it could be otherwise.

Another potential benefit for the licensee is that only a small number of ULR contracts need to be purchased, which may be helpful in covering the needs for “research and development, limited product releases, and the like.”[22]

Finally, IPXI could help remedy some of the larger issues plaguing the United States patent system.  These include patent trolls, the “patent thicket,” and rising costs of patent litigation.

D. Challenges Facing IPXI

The biggest challenge IPXI will face is finding buyers for the IP offerings.  Patents are inherently unstable assets that can be invalidated in court.  Further, parties often disagree about whether infringement actually exists or not.  This could make implementing an exchange for patent licenses very difficult.

The next challenge for IPXI will be finding high quality IP that will sustain a marketplace.  Patents expire and technology moves quickly, so taking advantage of IP rights often needs to be done quickly and efficiently.  It is unlikely that companies will be willing to list IP on the exchange that is part of their core business.  As a result, IPXI will be dealing with “leftover” IP to a certain extent.  IPXI must be able to sift out the worthless IP and exploit the valuable IP they come across.

A final difficulty IPXI will face is how to structure its procedure for dealing with infringers of the patents listed on its exchange.  One of IPXI’s goals is to reduce litigation and increase licensing.  But if litigation must be used as a last resort, IPXI must determine how the litigation should proceed and how it will be funded.  If parties are pooling patents these arrangements can get very complex, and IPXI would do well to develop a procedure for dealing with infringers.

III. Conclusion

IPXI is an exciting new entity that has the potential to significantly change the face of the IP marketplace.  Despite significant hurdles, IPXI is poised to help create a better true market for patents and increase transparency and predictability in such a volatile sector of the law.

[*] J.D. Candidate, University of Illinois College of Law, 2013.  B.S., Electrical Engineering, Olivet Nazarene University, 2008.  I am incredibly grateful to Jeff Charbeneau and Dr. Robert Sanders for their invaluable assistance in helping me develop this topic.  I would also like to thank the editing staff of the Journal of Law, Technology & Policy for all of their contributions to this article.

[1] David Silverman, Intellectual Property: The World’s Great Unknown Asset Class, Swiss Derivatives Rev., Autumn 2009, at 46, 46, available at http://www.sfoa.org/sfoa2010/include/Publications/doc/publi-pdf/SDR_41_Final.pdf.

[2] Kevin G. Rivette & David Kline, Discovering New Value in Intellectual Property, Harvard Bus. Rev., Jan.–Feb. 2000, at 7, available at http://www.pctcapital.com/pdfs/Harvard.pdf.

[3] The Exchange, Intellectual Prop. Exc. Int’l, http://www.ipxi.com/inside-ipxi/the-exchange.html (last visited Mar. 6, 2013).

[4] See Cameron Gray, A New Era in IP Licensing: The Unit License Right Program, Licensing J., Nov./Dec. 2008, at 1, available at http://www.oceantomo.com/system/files/New_Era_in_IP_Licensing_NovDec08_CGray_0.pdf (describing a new paradigm in IP licensing: the Unit License Right program, which is being developed by IPXI).

[5] Ian D. McClure & James E. Malackowski, The Next Big Thing in Monetizing IP: A Natural Progression to Exchange-Traded Units, Landslide, May/June 2011, at 3, available at http://www.ipprospective.com/wp-content/uploads/2011/05/mcclure-landslide_may_june20111.pdf.

[6] See Gray, supra note 4, at 5 (discussing how the ULR program can reduce transaction costs).

[7] James Bessen & Michael J. Meurer, Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk 132 (2008).  The cost for a similar suit through discovery is $1.20 million.  The mean cost including trial for a patent suit with more than $25 million at stake is $4.14 million.  The cost for a similar suit through discovery is $2.59 million.  Using a different metric, the mean legal costs for a patent owner in an infringement suit that goes to trial is $1.20 million, and $1.10 million if summary judgment is granted.  Comparatively, the mean legal cost for an alleged infringer in an infringement suit that goes to trial is $2.85 million, and $0.66 million if summary judgment is granted.  All numbers presented here are in 1992 U.S. dollars, so the current costs are likely much higher.  Id.

[8] McClure & Malackowski, supra note 5, at 3.

[9] Id.

[10] Sarah J. Duda & Benjamin Urban, The Patent Exchange: A New Approach to Licensing Intellectual Property, Snippets Volume 10, Issue 3, Page 11, available at http://www.mbhb.com/files/Publication/65686f54-b019-44ee-95ee-823981e6570f/Presentation/PublicationAttachment/145c9b5a-7903-4d5f-8244-89e9379e7b6c/Snippets%20Vol%2010%20Issue%203_081612-FINAL.pdf.

[11] Id.

[12] Id.

[13] Ian D. McClure, The Value of Efficiency and Transparency in IP Licensing: Let the Market Decide, Intell. Prop. Mag., Feb. 2011, at 53, 54, available at http://www.ipo.gov.uk/ipreview-c4e-sub-mcclure.pdf.

[14] Id.

[15] Duda & Urban, supra note 10.

[16] Id.

[17] McClure, supra note 13, at 54.

[18] See Intellectual Prop. Exch. Int’l, http://www.ipxi.com/inside-ipxi/faq.html  (last visited Mar. 10, 2013) (discussing how “[t]ranche pricing creates early adoption incentives for ULR purchasers”).

[19] McClure & Malackowski, supra note 5, at 4.

[20] Id.

[21] McClure, supra note 13, at 54.

[22] Duda & Urban, supra note 10, at 12.