Broken by a system that encourages bad behaviours, IPXI closes down
IPXI could have been a game-changing way to license patents; but after six years of trying, its members and management have thrown in the towel. Its CEO’s explanation for the failure laid the blame on a US system that incentivises conflict over deal making and leaves plenty for those who want to further weaken the rights of patent owners to contemplate
The news came without warning and caught many observers by surprise. On March 23, under the heading “Corporate Announcement”, IP Exchange International (IPXI) posted an announcement on its website: “With tremendous disappointment we announce that Intellectual Property Exchange International, Inc. will cease operations effective today.”
So ended a project that had begun in 2009 as an attempt to bring pricing transparency and much greater efficiency to the patent licensing market, and which along the way had gained buy-in from some of the IP market’s most sophisticated and knowledgeable players.
IPXI opened for business in early 2010. Modelled on the Chicago Climate Exchange, where president and CEO Gerard Pannekoek had previously been president and chief operating officer, IPXI’s unique selling point was the unit licence right (ULR). Patents made available for license on the exchange were to be divided into a defined number of ULRs, with licensees able to gain access to a licence by purchasing them. ULRs could be sold on if the licensee found it had too many; or it could buy more if necessary. With each unit price clearly posted, the patents themselves fully accessible and standardised contracts, IPXI claimed that its platform would make the patent licensing process quicker and less expensive than the traditional, bilateral deal-making model.
Although it took longer than expected to secure buy-in from the IP market, by the time it ceased operating IPXI had attracted 70 members, including many operating companies, universities and research institutions, as well as major financial investors and a stellar line-up of board managers. It had also made four public offerings on what were generally regarded to be high-quality patent packages (these came from Philips and JP Morgan, while there was a bundled portfolio relating to the IEEE standard 802.11n and involving patents from a number of sources), though none of these had closed. In fact, just three weeks before closing down, IPXI had announced two more offerings in development: WFN2, a ULR contract relating to the 802.11n multi-party offering; and WFAC1, a multi-party offering made up of a convertible series of ULR contracts covering patents with claims essential to IEEE Standard 802.11ac. Neither saw the light of day.
The end of the affair
The announcement of IPXI’s cessation of operations was posted on the exchange’s website on March 23:
With tremendous disappointment we announce that Intellectual Property Exchange International, Inc. will cease operations effective today. IPXI’s Board of Directors concluded that, while the goals and business model brought great hope to many in the industry, IPXI was not able to secure the cooperation of enough willing licensees to fully realize its concept.
We are incredibly proud of our smart, talented and dedicated staff who worked so hard over the past several years to bring IPXI’s first offerings to market. We also appreciate the support of our more than 70 corporate, university, laboratory and associate members who believed in our mission and helped us in trying to achieve substantially greater transparency and efficiency in the opaque world of intellectual property licensing. It appears that the time was just not right, and the obstacles – including potential licensees who challenged us to litigate instead of work with them – simply too insurmountable. IPXI’s business model offered fairness and transparency and relied upon patented technology users to be good corporate citizens. In the end, potential licensees made it clear that the only way IPXI would really get their attention was through litigation, and that’s exactly what our business model tried to overcome.
IPXI captured global attention in its effort, and we hope that others will work in the future to bring fairness, transparency and efficiency to this complex and litigation-driven market. We remain grateful to all of those professionals who played a role in our initiative, and to our Board and investors, thank you for your wise counsel and belief in us.
Clear blame
Speaking exclusively to IAM shortly after IPXI’s closure, Pannekoek was clear as to what had gone wrong. He blamed the exchange’s demise on a US patent system that he said inhibits good-faith licensing negotiations and encourages potential licensees to shun talks until they are hit with legal action.
Pannekoek explained that he had thought long and hard about why the patent licensing platform had failed, but could not get past the fact that the current environment in the United States makes it much more attractive for potential licensees to wait for court proceedings than to sit across the table with licensors to get deals done.
“We did encounter issues and we discovered flaws with the model, some of which were identified during discussions with potential licensees, who raised good points that we had not thought of,” Pannekoek said. “But we had the flexibility to deal with these: we were able to take them back to our five member committees and come up with solutions. It was a smooth process. In the end, I believe that what we hinted at on our website is the reason why it did not work out.
“While I remain extremely proud of our staff, members and board, and all we accomplished, the fact is that we were unable to achieve the last milestone: we could not get a significant number of entities to be good corporate citizens and respond to legitimate licensing offers where we had done 90% of the work in advance for them,” he continued. “They could go into our data rooms to find detailed information on prior art, evidence of use, claims charts, applicability, validity and so on; but in the end, that did not suffice.”
According to Pannekoek, IPXI was established in response to four key issues that make good-faith patent licensing on a voluntary basis in the United States difficult: determining quality, presenting evidence of use, deal transparency and pricing. “We addressed all these issues and provided solutions to them,” he said. “But even then, it turned out there was no incentive to talk without the threat of litigation.”
Not that this was always initially apparent, Pannekoek said: “We were astonished with some of the initial responses to our marketing efforts. We decided to go directly to the business operations of our potential licensees and approached CEOs and others in the executive suite to make a business case. When we sat down with those who got back to us, in most cases the initial discussions went very well – people understood what we were saying about it being an efficient, transparent process which allowed the licensee to get fair terms based on a market price.” But then, he continued, the process would stall: “At some point, the door was shut and eventually the response was, ‘We don’t need to do anything until you file in court.’”
Market failure
Pannekoek is neither a patent attorney nor a lawyer; but he does have a wealth of experience in high-level finance and investment, and believes strongly in the innate ability of markets to solve problems. IPXI, however, hit a brick wall – and it’s something that has clearly left Pannekoek exasperated. Nowhere is this more so than in relation to the package that IPXI put together for that collection of nearly 200 IEEE standard 802.11n compliant patents. “We provided in-depth due diligence on essentiality history, determination, claims charts and more, plus a 75% discount on payments relating to alleged past infringements, as well as the ability to be on a level playing field with market-based pricing,” he explained. “But still they were not willing to transact or negotiate.”
In fact, he continued, this did not come as too much of a surprise. “Once the marketing campaign had been prepared, I went to some well-known IP law firms to ensure everything we had done was consistent with our model and that we were in the best possible negotiating position,” Pannekoek recounted. “They gave me some great advice; but when I asked them what they would hypothetically advise a licensee who had been contacted by us, they were unanimous: ‘Don’t do anything until you are sued.’”
Although there was interest in all the packages that IPXI offered from smaller licensees, Pannekoek stated, the revenues that they would have generated would not have been enough to keep IPXI going during what would have been protracted litigation with bigger players. “We had long and intense discussions at the board level about whether we should go that route; but in the end it came down to whether, if we started to litigate in order to get our first licensees, we would really be any different from existing non-practising entities, and we would really be accomplishing what our investors and members set out to do.” The answer was no.
This means that the rights that had been offered via ULRs on the IPXI platform will now return to their original owners. “No doubt they will pursue other, more traditional means to get licences for what are high-quality assets,” Pannekoek remarked. “The IPXI board was not opposed to enforcement litigation – but only as a tool to ensure market integrity,” he continued. “Resorting to expensive and long-lasting litigation to get our first buyers was not consistent with what we were trying to do. If just one or two big companies had been good corporate citizens and taken a licence, then the willingness to enforce against others would have been there; but using litigation to get the first buyers to market is not what we were about.”
However, despite the numerous frustrating experiences that he and his team endured, Pannekoek did not condemn out of hand the companies that would not negotiate. Instead, he identified a bigger problem: “I am leaning towards the view that this was not about companies refusing to do deals with us, but was much more an issue with a system that does not encourage or facilitate good-faith licensing negotiations. Corporate legal advisers – whether internal or external – do not see any incentive to negotiate in good faith until there is the threat of litigation.”
Those who talk about the importance of increasing the burdens and risks on patent owners seeking to enforce their rights miss a crucial point, Pannekoek observed: “It seems to me that in the current debate on patent reform in the United States, while there has been a lot of focus on bad-faith assertions, there has not been enough attention paid to those who force litigation by refusing to license good patents.”
As for the future, Pannekoek does not expect IPXI, or anything like it, to resurface any time soon – at least not in the United States. “Asian governments and companies, especially, are very keen to explore non-aggressive licensing options and were always very supportive of what IPXI was trying to do,” Pannekoek said. “In Europe, they got it very quickly and seemed to be very pragmatic at both the corporate and European Commission level. In the US, though, the incentives just do not seem to exist.”
Depressing tale
This is a depressing tale; one which has seen a concept devised to address serious problems with the patent licensing market and make the process transparent, efficient and less expensive laid low because in the United States, there is currently very little incentive for a potential licensee – an infringer, in other words – to do anything other than sit tight until the lawsuits start arriving. As patent litigation rates start to rise again after falling last year, that may be something which legislators and advocates of further reform may want to ponder.
IPXI was not some fly-by-night trolling operation or a speculative punt launched by third parties who thought there might be a quick profit to be made from patents; instead, it was put together over a sustained period by a group of individuals and companies who know the patent market backwards. Its basic flaw, it seems, was to be based on the idea that good-faith deal making is what incentivises both sides in a licensing negotiation. Clearly, that is not the case; instead, the balance now tilts heavily in favour of the licensee, the infringer. And there are some who seriously advocate skewing things further. After IPXI’s demise, that looks even more poorly thought-out and damaging than it did before.