Looking Back on 2013: The Marketplace for Invention Comes of Age

This was a great year for independent inventors, entrepreneurs and almost everyone with a stake in intellectual property. Though some critics complained that patents and so-called “patent trolls” were hindering innovation, venture capitalists poured nearly record amounts of money into young companies with disruptive technology. The hottest field for venture investing was also the one where patenting has been especially intense: software. 

Patents were at the heart of a dazzling array of trading activity, mergers, alliances, and capital infusions. This activity cemented the idea that intellectual property is a major asset, and that buyers, sellers and investors can assign concrete financial values. Looking ahead, that will mean more capital for inventors of all types.

This year was also a high-water mark for political storms in Washington over patent litigation, patent reform and so-called “patent trolls.” President Obama made proposals, some of which we support. The Federal Trade Commission began an in-depth study, which we think is understandable given how new this marketplace is. But the House of Representatives rushed through a “reform” bill much too quickly, which will make it harder for many inventors to protect their ideas if it becomes law in its current form. The Senate will probably act on its own bill next year. Meanwhile, the Supreme Court decided to revisit a thorny and closely related issue in patent law – what kind of software is eligible to be patented.

Given all that, 2014 is almost certain to be another momentous year. But before it comes, let’s look at five milestones that we passed. Two themes dominate: the growth of a vibrant and professional marketplace for invention, and the fight in Washington over patent reform.

1. Patent Values Kept Soaring. 

We thought we’d seen it all in 2012, when Google paid $12.5 billion for Motorola Mobility – largely for its patents. But the buying and selling of patents hasn’t stopped, as corporations and financial institutions became ever more sophisticated about placing a hard dollar value on intellectual property.

• In February, a consortium led by Intellectual Ventures and RPX Corporation completed its $525 million purchase of Kodak’s patents in digital imaging technology, helping bring an American icon back from the brink of bankruptcy.
• In September, Microsoft paid more than $2 billion for Nokia’s patents in mobile communications, on top of about $5 billion for Nokia’s handset business.
• In November, Fairfax Financial Holdings and other investors agreed to pump $1 billion into BlackBerry, the struggling smartphone company. Analysts have estimated that BlackBerry’s patents could be worth $2 billion or more.
• In December, Allied Security Trust announced a public auction to sell more than 400 patents for widely-used computer-chip architectures developed by MIPS Technologies. AST, a “defensive aggregator,” acquired the patents last year for $350 million.

2. Investors Recognized Patents as Bankable Assets.

Banks and investment firms increasingly recognized this year that patents were solid enough to serve as collateral for major loans. Financial institutions became more sophisticated about valuing patents based on estimates of future cash-flow and earnings. That is making the invention marketplace as a whole more professional, informed and vibrant.  

• In March, the Fortress Investment Group created a new group to provide companies with debt financing secured by their patent portfolios. By July, it was providing its first IP-based credit lines.
• In December, France’s Alcatel-Lucent negotiated a $2.1 billion loan package, secured largely by its portfolio of 29,000 patents in telecommunications. It was an important example of how even a struggling company – Alcatel is in the midst of a major restructuring – can tap its intellectual property as a strategic financial asset.

3. Patent-holders found new ways to team up with high-tech start-ups.

We pioneered the business model of investing in patents, and generating revenue through buying, selling and licensing. But the role of “patent-assertion entities” or “non-practicing entities” keeps evolving, and it now involves partnerships to develop new technologies and identify new markets for them. 

• IV continues to spin out new companies to commercialize its own technology. In August, we spun off Evolv Technologies, Inc., which is using metamaterials imaging technology for security in airports and other high-risk facilities. Evolv, IV’s third spin-out, raised $11.8 million from venture capital investors, as well as Bill Gates. 
• We weren’t the only “patent-assertion’’ entity to team up with high-tech entrepreneurs. In September, IPNav helped Ditto Technologies – a start-up with technology that lets people try eyeglasses on online – fight patent-infringement lawsuits from corporate rivals. 
• Manufacturing companies, meanwhile, found new applications for their existing patents. In April, General Electric (GE) entered a broad patent-sharing partnership with Quirky, a Manhattan-based start-up that designs smart household gadgets. Quirky is adapting GE technologies, which were mainly developed for big equipment, for consumer devices that can be controlled by smartphones and over the Internet. Two early results: an egg tray that sends out an alert when the expiration date is nearing and a power strip that connects to the Internet.  Quirky has already raised $170 million in venture capital, including $30 million from GE.

4. “Patent Troll” lost its meaning.

Even though critics kept complaining about “patent trolls,” who they usually defined as companies that hold patents and collect royalties but don’t “make anything,” the epithet became hopelessly muddled by the end of the year.

When every organization from universities to operating companies defending against IP infringement was accused of being a patent troll, it became increasingly difficult to differentiate the business model from the behavior. Even more so when some campaigners came under fire for engaging in the very same “patent troll” behavior they were railing against.

• In July and then September, Boston University sued more than two dozen companies, including Apple and Microsoft, for infringing a 1997 patent on a thin-film semiconductor. 
• In September, Carnegie Mellon University won a $1.17 billion verdict against Marvell Technology Group for allegedly infringing its patents on a widely-used technology for screening data in disk drives. 
• In October, a consortium called Rockstar sued Google and more than a half-dozen major smartphone manufacturers for patent infringement. Rockstar doesn’t make anything, but it is owned by a consortium of large manufacturers that includes Apple, Microsoft, Ericsson, and Sony.

We aren’t taking sides in these fights. We would just point out that the problem, if it exists, isn’t with patents or companies that “don’t make anything.” The Founding Fathers explicitly allowed for inventors to license or sell their patents, rather than make the products themselves. This has been a pillar of innovation in the United States for more than two centuries. The issue is with frivolous lawsuits, filed in the hope that companies will settle, rather than defend themselves in court – and those can come from manufacturers as easily as from “non-practicing entities.”

5. Patents Wars Become Political Wars.

If Apple and Samsung set a new bar for patent wars in the courtroom, Washington was at the forefront of the political war over “patent trolls.”

We agree that there are bad actors, and we support a number of ideas to rein in oft-caricatured “patent trolls”. We endorsed efforts by President Obama to improve the quality of patents granted, which would reduce the ability of bad actors to make trouble in the future. We also supported proposals to make the losing side in an infringement suit pay the winner’s attorney fees, which would discourage people from filing frivolous lawsuits, as long as the penalties to bad behavior applied equally to operating companies as well as “non-practicing entities.”

• In August, however, the Government Accountability Office upended much of the conventional criticism. In a long-awaited report to Congress, the GAO concluded that the volume of patent litigation has increased much less dramatically than critics have claimed and that the bulk of patent lawsuits are filed by operating companies – not non-practicing entities. The most important way to improve the system, it said, would be to improve patent quality – a conclusion we strongly endorse. Focusing on NPEs, it concluded, would be “misplaced.”
• In late October, the House Judiciary Committee unveiled a broad bill – HR 3309, the Innovation Act – aimed at curbing dubious lawsuits. Though well-intentioned, the bill is packed with intricate provisions around discovery rules and re-examination requests that could make it much more difficult for inventors to stop companies that infringe their patents. The bill shot through the House in just five weeks, after only one hearing. More than a few critics, including  prominent inventors, the American Bar Association, biotech companies, universities, and others,  have called it a rush to judgment that could hurt independent inventors and many small companies.   

The debate will continue in 2014, as the Senate takes up a bill by Sen. Patrick Leahy, chairman of the Senate Judiciary Committee. We understand the desire to stop abusive legal tactics, but hope that Congress doesn’t inadvertently undermine one of the great engines of innovation in the process.