U invests in a ‘patent troll’

Several schools worldwide either invest in or license patents through Intellectual Ventures.

by Jeff Hargarten

Research schools across the globe, including the University of Minnesota, are connected to a controversial patent firm some accuse of stifling innovation.

While the University doesn’t sell its patents to Intellectual Ventures — believed to be the fifth-largest U.S. patent holder — it’s among many schools that have invested in the company.

Critics have questioned the ethics of research institutions investing in a company seen as hindering technological innovation and product development — staples of the American dream.

A group of former technology company executives founded Intellectual Ventures in 2000. It’s now a private company worth $5 billion that boasts partners like Fortune 500 companies and research universities around the world.

The company itself doesn’t turn patents into commercial products, which some say slows the development of ideas. It instead purchases vast numbers of patents from inventors and charges organizations fees for using the ideas. Those fees make up an estimated 90 percent of the company’s revenue.

It also files lawsuits against companies it accuses of infringing on patents in its huge portfolio that haven’t paid fees. These practices have caused some to label Intellectual Ventures a “patent troll.”

Altogether, it’s a recipe for controversy. There is a “legitimate and important debate about university investment ethics,” wrote Melba Kurman, founder of university technology consultant company Triple Helix, about Intellectual Ventures and its relationships to schools.

Institutions that bring products to the market are being pressured to invest in Intellectual Ventures. When they don’t, they’re threatened and sued for innovating, said Mike Masnick, president and CEO of technology analysis publisher Floor64.

“That money should be going towards building better products and serving the market.”

Stifling innovation?

Patents that universities sell to Intellectual Ventures may not see the light of day as products.

“Among the mass aggregators, there are almost no cases of patents turning into products, as far as we’ve been able see,” said Robin Feldman, a law professor at the University of California  and an author of a 2011 Stanford Technology Law Review paper about Intellectual Ventures. “It appears to be a dead end.”

Kurman pointed out that U.S. research universities and Intellectual Ventures have something in common: They both own large patent portfolios and license their patents to others in exchange for fees. A university’s primary mission is to teach and research rather than manufacture.

Feldman questioned whether it’s consistent with that mission for schools to license their work to another “non-practicing entity,” the name the industry gives to patent holders, like Intellectual Ventures, that don’t manufacture products.

Robert Moll, a California-based patent attorney, said just because a NPE holds a patent doesn’t mean that the invention won’t ever make it into production, as the development of a new invention often takes years.

For those of the 400 universities and companies expecting their deals with Intellectual Ventures to lead to commercial products, there’s a “stark difference” between patenting and building inventions, the Stanford study said.

 While patent aggregators like Intellectual Ventures publicly promote innovation, the study said, its actions may actually lead to fewer inventions becoming products.

“We’re past due for a thoughtful public discussion of whether university-owned patents should become part of [Intellectual Ventures’] patent arsenal,” Kurman said.

‘Patent trolling’

The company’s history of patent lawsuits has drawn criticism from corporations and academia.

As of May 2011, Intellectual Ventures owned between 30,000 and 60,000 patents, the bulk of which were purchased from other inventors, according to the Stanford study.

About 2,000 of those were developed in-house and the company had reportedly spent about $1 billion acquiring technology patents as of May 2009.

“These entities, which we call mass aggregators, do not engage in the manufacturing of products nor do they conduct much research,” said the Stanford study, entitled “The Giants Among Us.”

The firm files lawsuits against organizations it accuses of infringing on its intellectual property. That practice has earned the company the “patent troll” moniker from detractors.

The Stanford study said companies see “troll activity” as something between extortion and a drag on innovation.

In the past few years, the company has filed waves of lawsuits against major software and computer companies for patent infringement.

In February, Intellectual Ventures filed lawsuits against AT&T, T-Mobile and Sprint-Nextel. AT&T already owns about 500 patents allegedly predating Intellectual Ventures’ patents. Representatives from all three companies declined to comment on pending litigation.

Verizon has invested in legal protection from Intellectual Ventures and used a patent from the company to sue TiVo in 2010.

Many organizations invest in the firm to gain “legal immunity” against its vast intellectual property library spanning almost all technological areas, according to a report from market research firm Dolcera.

Without striking some sort of deal with the company, corporations and universities may be subject to infringement suits.

A key argument against “patent trolls” isn’t that their lawsuits are invalid, but instead their position to negotiate licensing fees is “grossly out of alignment” with their actual contribution to products or services described by the patents, said a Northwestern University study.

“My concern with Intellectual Ventures is that it is effectively acting as a tax on innovation,” Masnick said.

Kenneth Lustig, vice president and head of strategic acquisitions for Intellectual Ventures, defended the lawsuits in a February Forbes article.

“To hear some critics tell it, the explosion of patent suits in the smartphone industry is evidence of a patent system that is fundamentally broken, at great cost to U.S. innovation,” his statement said. “Such histrionics, however, ignore a crucial but little known fact: Throughout American history, the buying, selling and litigating of patents has always been essential to U.S. economic success.”

A lawsuit between Intellectual Ventures and a California technology company forced the release of documents listing the firm’s investors, which include the University and its fundraising arm.

U’s money ties

The University has about $100,000 invested in an Intellectual Ventures fund through the financial firm Charles River Ventures.

It’s one of many investments the school holds through third parties, and it’s a small amount compared to its other holdings, said Stuart Mason, associate vice president of the University’s Office of Investments and Banking.

The University of Minnesota Foundation, the legally separate fundraising organization for the school, has also invested some of its roughly $1.3 billion endowment in Intellectual Ventures as part of its many portfolios, said Foundation spokesperson Martha Douglas.

About a quarter of the endowment is invested in private equity interests, including Intellectual Ventures, which represents a very small amount.

The exact numbers of the Foundation’s investment are protected by a standard confidentiality agreement, Intellectual Ventures spokesperson Naomi Zeitlin said.

Unlike some schools with ties to Intellectual Ventures, the University doesn’t and hasn’t ever licensed its technology through the firm, said John Merritt, spokesperson for the Office of the Vice President for Research.

“Sure, the company is the target of controversy and criticism due to [Intellectual Ventures’] business model, but that hasn’t stopped universities from investing their endowments before,” said Kurman, the technology commercialization consultant.

Intellectual Venture’s university connections

While there are a few schools, like the University, with investments in the firm, it’s much more common for them to license or sell patents to Intellectual Ventures, Zeitlin said.

Some deals may involve schools selling or licensing a few patents, university investments or the “wholesale assignment of future innovation,” the Stanford study said.

The company reported it works with more than 3,000 inventors at 400 universities and companies worldwide.

Cornell University is a limited partner in one of the firm’s investment funds, said Alan Paau, executive director and vice provost for technology transfer and economic development at the school. He said the university’s relationship with Intellectual Ventures is at “mostly arm’s length.”

The University of Texas invested a total of about $28 million in two Intellectual Ventures funds, according to a 2010 performance analysis from the school. It showed negative returns from each investment of 73 percent and 10 percent.

The University of New South Wales in Australia has a licensing deal with the company, which assigns “requests for invention” (RFIs) to the school’s researchers to invent something the firm can patent.

Zietlin said that’s “typical” of the company’s relationships with universities. Intellectual Ventures has paid millions to universities for their inventions and in many cases has profit-sharing arrangements in place to provide schools with an ongoing revenue source, she said.

Masnick said there are tax benefits for schools licensing technology through Intellectual Ventures, but a primary reason is that “a very large percentage of university tech transfer offices have been pretty big flops.”

The Bayh-Dole Act in 1980 prompted universities to commercialize their patents and set up technology transfer offices to generate additional revenue.

Intellectual Ventures bought “tons of patents” from universities, which the schools sold to the company to show at least “some return and to justify their own existence” as technology transfer offices, Masnick said.

In contrast, the University is the eighth-best research institution in the country, according to the National Science Foundation. The school’s commercialization processes were recently revised to allow school faculty to more easily launch their own startup companies based on their inventions. Last year, the University saw a five-year high for new startups and patents filed.

‘The forgotten inventor’

For researchers and inventors, patenting ideas can be a tricky process.

Intellectual Ventures co-founder Nathan Myhrvold told The New York Times in 2010 that his company is trying to change the patent industry and increase the financial rewards for innovators, whose intellectual property is often used by corporations without compensation. At the time, Intellectual Ventures reportedly had paid $315 million to individual inventors.

The University of New South Wales called the company “a global matchmaker of good ideas.”

Many times, inventors may design something they’re unaware someone else has already developed and patented, or multiple inventors may be working on similar issues at the same time. The “forgotten inventor” in these situations may not be rewarded for the initial work, which somebody else may be profiting from, the Stanford study said.

The size of Intellectual Ventures’ patent library may persuade companies the firm sues into settling infringement claims, the study said, giving those licensing through the firm a “litigation defense fund” to lean on.

Moll, the patent attorney, said Intellectual Ventures could help “level the playing field” for small companies, individual inventors and nonprofits like universities.

“Our company is challenging the status quo,” Intellectual Ventures President Adriane Brown told The New York Times last month. “Our business model is disruptive, and like any other product or service that disrupts established markets, we’ve invited our share of controversy. But we are no different from any other company working to deliver on its mission.”

The company has spent about $1 million a year on lobbying in Congress the past few years, according to the Center for Responsive Politics, and court documents allege it has organized union opposition against patent reform.

President Barack Obama signed the America Invents Act in 2011, making it harder to win and file mass infringement lawsuits.

“What created the incentive for mass aggregators is the current patent system,” said Feldman, an author of the Stanford paper.

It’s often hard to know what technological developments a patent actually covers, and this leads to “bargaining of epic proportions.”

The rise of companies like Intellectual Ventures was an attempt to deal with those problems, she said, but it has since moved in “a destructive direction for innovation.”