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Intellectual Ventures

On September 24, “invention firm” Intellectual Ventures announced the first major legal settlements in firm history, resolving separate patent infringement litigation claims against memory chip companies SK hynix Inc. and Elpida Memory, Inc. for undisclosed sums. [1]

These events mark a rare public event for the secretive firm, which touts itself as the designer of the invention capital market. Founded by Microsoft executive alums Nathan Myhrvold and Edward Jung, Intellectual Ventures purports to be the first major player in the monetization of invention and in what its founders deem “Invention Capitalism”, a medium through which they hope to “make research something you can invest in.” CEO Myhrvold believes that creating this market for invention capital will radically alter the innovation landscape, “turbocharg[ing] technological progress, creat[ing] many more new businesses, and chang[ing] the world for the better.” [2] Such an undertaking would ostensibly require the firm to build a system where infringed-upon patent designers could connect with service providers (such as Intellectual Ventures) who would ensure that the inventors are being adequately compensated for their patent designs, subsequently incentivizing future inventors to continue their innovative pursuits.

Belying such lofty goals, though, is the firm’s business record to date, bringing to mind a much more mundane and nefarious notion than the firm’s stated mission—that Intellectual Ventures is simply the latest, and largest, in a long line of mega “patent trolls”. Though the firm has designed in-house some of the patents it holds in its portfolio, it is considered an NPE, or nonpracticing entity—a kind of entity that holds patents but does not manufacture corresponding products. The firm has not disclosed the size or content of its patent portfolio, but one study estimates that the firm has acquired from 30,000 to 60,000 patents through over 1,200 shell companies from individual inventors, corporations, governments, research laboratories, and universities (as of May 2011).[3] Such a total would place Intellectual Ventures among the 15 largest patent portfolio holders worldwide—a space previously dominated solely by tech juggernauts such as Microsoft and IBM.

Companies utilizing Intellectual Ventures’ services can receive access to the firm’s patent portfolio and license patent rights to quell infringement concerns when manufacturing their own technological products. The firm also markets a program called “IP for Defense”, through which Intellectual Ventures’ investors such as Verizon (who purchased an equity stake in the firm of $350 million) have utilized the firm’s patent portfolio as part of a litigation defense strategy. Faced with a pending infringement suit from TiVo, Verizon purchased a patent from Intellectual Ventures, subsequently utilizing the patent as the basis for a counterclaim in the TiVo suit. Despite the cries of Intellectual Ventures to the contrary, such practices are often considered an encumbrance to innovation rather than a vehicle for it, allowing non-inventors (such as Intellectual Ventures) to collect, or threaten to collect, a disproportionate return on patents while adding little value to the final commercial product. [4]

But regardless of the firm’s true effect on innovation or the patent market, it has accrued a sizeable following amongst investors, with over $5 billion of assets now under management,[5] funded from a disparate group including the likes of Amazon, American Express, Sony, and the University of Notre Dame. [6] Myhrvold notes that the firm has been structured in a form resembling traditional venture capital and private equity funds, allocating monies received into at least five different internal funds, and receiving approximately a 2% management fee in addition to 20% on the carried interest derived from the firm’s business operations. [7] With their current funding level, Intellectual Ventures will need to generate an unprecedented level of revenue from their patent portfolio to be a viable investment in the venture capital space. Stanford academics Robin Feldman and Tom Ewing estimate that, assuming a 10-year investment lifetime, the funds need to yield a lifetime revenue expectation of “roughly $40 billion to be considered a minimally successful investment.” [8]

Such daunting revenue expectations, though, have not prevented Intellectual Ventures nor budding market participants such as Acacia Research Corporation, Transpacific IP Ltd., RPX, and Round Rock Research, LLC from continuing to acquire more patents for their growing portfolios. Though the firm’s secrecy and usage of third parties to carry out the bulk of its litigation activities obfuscate what its vision towards long-term profitability and innovation truly entails, its recent settlements with SK hynix Inc. and Elpida Memory, Inc. and 2010 suits filed against two other technology companies suggest that perhaps they are finally ready to shed more light on how the company plans on building a robust invention market. [9] [1] Intellectual Ventures Resolves Patent Disputes with SK hynix Inc. and Elpida Memory, Inc. , Intellectual Ventures (Sept. 24, 2012), http://www.intellectualventures.com/index.php/news/press-releases/intellectual-ventures-resolves-patent-disputes-with-sk-hynix-inc.-and-elpid

[2] Steve Lohr, Turning Patents Into “Inventional Capital”, N.Y. Times, Feb. 17, 2010, at B1.

[3] Tom Ewing and Robin Feldman, The Giants Among Us, 2012 STAN. TECH. L. REV. 1, 5 (2012). http://stlr.stanford.edu/pdf/feldman-giants-among-us.pdf

[4] Id. at 1

[5] Intellectual Ventures Corporate Fact Sheet, Intellectual Ventures, http://www.intellectualventures.com/assets_docs/IV_Corporate_Fact_Sheet.pdf

[6] Ewing and Feldman at 9

[7] Id.

[8] Id. at 12

[9] Id. at 14-15

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Kevin Sherrin

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