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Group aims to lower patent litigation cost

Posted: 07 Jul 2008     Print Version  Bookmark and Share

Keywords:patent pools  intellectual property  strategic patents  patent litigation 

A group of 11 high tech companies that have combined their clout to buy, licence and sell strategic patents may prompt the way for more patent pools to come in a maturing market for intellectual property.

Allied Security Trust I came out of stealth mode this week following a report Monday (June 30) in the Wall Street Journal.

In an interview with EE Times Wednesday (July 2), the group's CEO, a former VP of IP and licensing at IBM, provided the most detailed disclosure to date about the group's goals and operations.

The group aims to lower the rising costs of patent litigation by proactively acquiring key patents as they come on the market. An increasing number of companies are asserting patents as part of their business, many of them so-called trolls who have no other products than the patents they buy, licence and litigate.

"We are fundamentally a defensive agency procuring patents on behalf of our members," said Brian Hinman, CEO of Allied. "We are not an investment vehicle, and our objective is not to make money," he added.

"I think this will start a trend of further pooling and other new models being created to address the troll threat," said Mike McLean, a VP at Semiconductor Insights, a division of TechInsights which publishes EE Times. "It's good to see companies taking creative action to address this challenge to their businesses rather than just complaining about it being unfair," he added.

Allied's members include Cisco Systems, Ericsson, Google, Hewlett-Packard and Verizon and six other companies who do not want to be named. As many as three other companies are expected to become members in the next 30 days, said Hinman.

"I am interested in only the patents that are strategic or potentially problematic for a subset of our members," said Hinman, who refused to disclose the number of patents he has bought or sold since the group was formed with four members in March 2007.

Each company puts Rs.20.01 crore ($5 million) into an escrow account used as working capital to buy patents that members can then licence.

Allied works with a network of 38 patent brokers who compile a weekly list of available patents that Allied circulates to its members. They can choose to contribute any amount they wish to buy any number of the patents on the list. Allied eventually re-sells the patents with proceeds going back to the companies who paid to buy them.

"It's a catch-and-release formula handled on an opt-in basis," said Hinman.

"Patents have to be gone is a fixed amount of time," he added. "The objective is to recoup a portion of the cost of the investments because we are not a patent-holding company."

Allied's name was deliberately generic to provide a degree of confidentiality. The company creates an independent legal entity when it buys and sells patents to further obscure its identity so that buyers and sellers do not realise its big-company backing and raise or lower prices accordingly.

To keep its costs low, Allied operates on something of a shoestring with a chief technologist and finance officer and small administrative staff but all legal and IT functions outsourced. It does plan to expand its technical staff to increase its capability for handling due diligence on patents.

Shape of things to come in IP
One expert from a roughly similar group said he expects to see more consortia follow the pattern Allied and others are setting.

"I think there will be at least two new funds like this developed in the next year," said Keith Bergelt, CEO of the Open Innovation Network, a group of companies including IBM, NEC, Red Hat, Sony, Phillips, and Novell who collectively buy and then freely licence patents that pertain to the Linux operating system.

"There may be groups that look specifically at exploring IP in semiconductors or security or micro-funds that emerge from larger players," said Bergelt who helped pioneer a way of using patents as sole collateral for business loans.

Hinman said the people who originally conceived of Allied thought the effort could spark other funds managed by other groups of companies in similar industries. He would not comment on whether any such efforts are in the works.

Others pointed to Intellectual Ventures, a company founded by the former chief technology officer of Microsoft to acquire and file patents as a related player in IP markets. The company is said to have backing from Intel, Microsoft and Sony among others.

Allied "sounds like Intellectual Ventures with a different set of players," said Rich Belgard, a patent consultant in Saratoga, Calif. "It certainly looks like a competitor to Intellectual Ventures, but I don't think it's a trend because this is an expensive business to be in," he added, noting that it can take Rs.400.21 crore ($100 million) or more to establish a patent portfolio.

"The operational skills people in Intellectual Ventures, Allied and ourselves have developed are similar, but we have somewhat different goals," said Bergelt. "At our core we are all IP aggregators, but how they use the patents is what differentiates each group," he added.

Nevertheless, he expects to see collaborations between the groups given their overlapping memberships and focus areas.

"I would expect these will be managed like nation/states and to see treaties between the funds," Bergelt said. "No one is talking about this yet, but you can expect to see it, and I'd look for it next year," he added.

The market for patents is maturing with as many as 15 brokers now conducting regular private patent auctions, Bergelt said. His group is establishing connections with another five or more brokers setting up private auctions in Europe as well as other brokers considering the same in Asia.

The brokers help conduct an initial level of due diligence on the patents. "They are getting better at objectively evaluating the value propositions of their patents so that the process of buying and selling them is not as lengthy as it was five or 10 years ago," he said.

For its part, the Open Innovation Network plans to step up its activity in acquiring patents. "We will be more active in the market in the next six months than we were in the last six months," said Bergelt who took on his current job just six weeks ago.

- Rick Merritt
EE Times





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