PublishedDecember 18, 2012

Intellectual Ventures’ Technology Speculation Is Not A Justification for Shell Companies

During last week’s Department of Justice/Federal Trade Commission workshop on Patent Assertion Entities (PAEs), one of the panelists was Peter Detkin.  Detkin is a founder of Intellectual Ventures, one of the PAEs we have been critical of on Patent Progress.

In the run up to the workshop, Detkin authored a blog post attempting to issue a pre-emptive rhetorical strike against the FTC, which is strongly considering bringing transparency to patent ownership, and has announced an open submission for comments on this issue.  As we have discussed before, Intellectual Ventures has set up almost 1276 shell companies, obscuring the ability of their opponents to figure out who owns what.

At the FTC/DOJ workshop on patent trolls, Detkin, along with other PAEs, asserted that the PAE business model is good for the economy and good for individual inventors.  Detkin proposes in his blog post that transparency, the undoing of the elaborate shell company structure, would hinder Intellectual Ventures’ ability to be innovation speculators.  Intellectual Ventures buys patents today based on what they think the technology trends will be a decade down the road.  This is pernicious economic activity that harms consumers and businesses — basically, Detkin is admitting they need shell companies to hide their portfolio because it will tip off the market to what they see as the future.  But unlike investment portfolios that speculate on future gains, Intellectual Ventures is not seeking to benefit off of the success of future technologies and help them flourish.  Rather, Intellectual Ventures wants to hold them back and extort a fee from their success.  This is not an economic benefit and it is an absurd reason to allow continued transparency.  For Detkin’s theory to have any standing, a prior assumption that Intellectual Ventures is providing economic benefits would be required.

The idea that PAEs like Intellectual Ventures are providing an economic benefit to society is a fallacy.  Another panelist, Mallun Yen of RPX Corp, disposed of that assertion neatly by citing to a study showing that only a small percentage of the proceeds of PAEs go to inventors and investors — rather, they end up in the hands of law firms, patent consultancies and so forth.  In other words, there are very high transaction costs without an economic benefit from Intellectual Ventures’s business model.

Similarly, the claim that PAEs, through their litigation activities, create an efficient and robust secondary market in patents is also a sham.  The only thing the PAE “market” incentivizes is additional litigation.  They have successfully created a litigation marketplace, not an innovation marketplace.  One simple piece of evidence supporting this assertion: operating firms that actually practice inventions and deliver goods and services in the marketplace spend more money on obtaining and litigating patents than they do on research and development.

We don’t mean to pick on Peter Detkin exclusively.  Another PAE at the FTC/DOJ workshop, Ron Epstein, CEO of Epicenter IP Group, in an effort to defend patent trolling, inadvertently supported the FTC’s transparency push.  Epstein argued that because once-in-a-while a tech patent comes along that all can agree is genuinely innovative and valuable, trolls are needed to “arbitrate” the process of obtaining a reasonable royalty from unanimously and belligerently unwilling companies.  But PAEs like Intellectual Ventures do not license individual patents.  They license patent portfolios.  In other words, they wrap one or two good patents in a thick wad of garbage patents, and license the entire thing.  This gives an unwarranted patina of validity to the bad patents and blurs the lines.  Intellectual Ventures and other PAEs do exactly the opposite of the supposed good that Epstein asserted.  Their model is not about finding the good and valuable patents and making sure the inventor gets paid for it, but rather about obscuring the value of individual patents via the portfolio model in order to enrich themselves.

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Josh Lamel

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