An Empirical Look at the "Brokered" Market for Patents.

• Author: Love, Brian J.

1. INTRODUCTION

   Scholars, attorneys, and business professionals have long bemoaned the lack of available data on the market for patent transactions.1 While resources exist to value cars, real estate, coins, comic books, and myriad other goods and services, no equivalent exists for patent rights.2 Despite producing billions of dollars in annual revenues worldwide,3 the market for licensing and buying patent rights operates in near total darkness. Virtually all deals are negotiated in secret and thereafter come to light only rarely.4 As a result, potential buyers and sellers often have a hard time locating one another and, when they do, often cannot agree on the appropriate methodology for determining a price, let alone what that price should be.5

   (last visited May 22, 2018) (listing price estimates for residential real estate); Coin Price Guides, COINWEEK, http://www.coinweek.com/coin-prices/coin-price-guides/

   In addition to throwing sand in the gears of the market for patent rights, this lack of transparency contributes indirectly to many of the patent system's gravest ills. Many worry, for example, that damages awarded in litigation lack a meaningful connection to the real world value of patented technology, in part because so much of the market is unobservable. (6) A lack of reliable pricing information also opens the door for arbitrage, a factor contributing to the rise of "patent assertion entities" ("PAEs")--patent monetization specialists that are uniquely able to wield various forms of "holdup" power over the parties they sue in order to extract settlements that reflect more than the value of the asserted patent. (7) Conversely, the costs inherent in participating in an inefficient market contribute to the fact that many tech companies choose to turn a blind eye to the market entirely, a practice decried by many patentees as "holdout" behavior designed to raise the cost of patent enforcement. (8) These concerns - each among the most debated patent law issues of the last quarter century - would see significant improvement in a world with a transparent market for patent rights. However, information about patent transactions has to date proven hard to collect and interpret.

   Currently available information about the patent marketplace is largely anecdotal and qualitative in nature. Scholars have studied market conditions primarily by interviewing market participants (9) or conducting case studies of firms known to be active in the market. (10) Though a few studies have collected quantitative data on transactions, such studies generally suffer from methodological limitations that make their findings hard to generalize. For example, while several scholars have sought to study patent transactions by collecting patent reassignment information disclosed to the U.S. Patent and Trademark Office ("PTO"), (11) these studies are limited by, among other confounding factors, the fact that patent reassignments are voluntarily disclosed, that patent reassignments often reflect corporate mergers or name changes rather than actual sales, and that PTO records lack any information about the price paid for the patent. (12) Other scholars have attempted to overcome these hurdles by accessing data on actual transactions, but again their studies paint at best a partial, skewed picture of the market. While a handful of studies have collected data on patent transactions disclosed to the Securities and Exchange Commission ("SEC") (13) or patent auctions conducted by Ocean Tomo, (14) it is well known that these deals represent only the tip of the iceberg and, moreover, are far from representative of the broader market. (15)

   In this Article, we take advantage of Richardson Oliver Law Group's ("ROL Group") unique position as an active participant in the patent marketplace to present what we believe to be the largest and most representative empirical study of the secondary market for patent rights. Our data spans five years of transactions, involving almost 39,000 patent assets, an estimated eighty percent of all patents offered for sale on the quasi-public "brokered" market during the period of our study. (16) For the first time, we provide near-comprehensive statistics on the size and composition of the brokered market, including the types of buyers and sellers who participate in the market, the types of patents listed and sold on the market, and how market conditions have changed over time. Our findings have importance for ongoing debates about how best to value patent rights, how to quantify the costs and benefits of patent monetization, and what impact recent changes to patent law have on companies with patent portfolios.

   This Article proceeds as follows. Part II provides background on the secondary market for patents, including the types of entities that participate in the market. Part III explains our data collection methodology. Part IV provides descriptive statistics that summarize what we observe in the data, and, finally, Part V discusses what our data can tell us about the patent system.

2. THE SECONDARY MARKET FOR PATENTS

   Conceptually, the market for patent rights can be divided into deals that license the right to use patented inventions and deals that lead to the outright sale of one or more patents. (17) The market for patent sales can, in turn, be further subdivided into two market segments: first, a quasi-public "brokered" market of packages that are shopped to multiple potential buyers and, second, a private market of transfers that are negotiated in secret between specific par-ties. (18) Figure 1 provides a simple depiction of these market divisions.

   The first "brokered" market segment consists of patent packages that are offered widely to prospective buyers and thus are generally observable to interested market participants, though typically subject to confidentiality agreements that render the market unobservable to the public at large. (19) Almost without exception, patents offered for sale in this quasi-public market are shopped by patent "brokers," (20) and for this reason we refer to it as the "brokered market." Brokers are, in effect, the intellectual property equivalent of real estate agents. They market patents on sellers' behalf in an attempt to find and negotiate deals with potential buyers, (21) and in return, they take a fee of roughly twenty percent of deals that they close. (22)

   Figure 1: The Market for Patent Transactions (23)

   Patent purchases that take place outside the brokered market are both harder to observe and harder to categorize. Anecdotally, sales in this "private" market tend to be relatively large deals negotiated directly between buyers and sellers, often without the assistance of brokers. In our experience, private sales are more idiosyncratic in nature and frequently are motivated by a broader set of considerations that extend beyond the transferred patents. Consider for example one deal that became public in 2014. That year, Twitter purchased 900 patents from IBM in a $36 million deal. However, the parties' agreement followed a threat from IBM to file suit against Twitter shortly before its initial public offering, and the deal included cross-licensing terms in addition to the transfer of patents.24

   Buyers, like sellers, also participate in the patent marketplace both indirectly through third parties and directly without representation. For buyers, however, the division is not nearly so stark across market segments. In both the private and quasi-public markets, buyers are often indirectly represented by patent "aggregators," entities that are frequent purchasers and generally exist to facilitate coordination among multiple buyers with similar interests. (25) "Defensive" aggregators like Allied Security Trust and RPX use a membership fee-based model to accumulate funds that can be used to purchase patents of interest to their members. (26) Generally, these patents fall into one of three categories: (i) patents currently being enforced against members, (ii) patents that members fear may be asserted against them in court down the road, or (iii) patents that members wish to hold for possible defensive use against competitors. That said, some entities that have been categorized as aggregators do buy with monetization in mind and thus are generally also considered PAEs. (27) Intellectual Ventures ("IV"), which owns upwards of 38,000 patents and applications, (28) is undoubtedly the most famous example. Though largely funded by operating technology companies like Microsoft, Intel, and Sony, (29) IV's business model goes well beyond defensive acquisition. In fact, it is generally understood that IV earns the "vast majority" of its revenue from licensing its portfolio. (30)

   Despite the large sums of money at stake and the sophistication of many buyers and sellers, there remains no central clearinghouse for patent offerings. However, several third-party platforms play an important and increasingly common role in bringing potential buyers and sellers together. For example, auction houses like Ocean Tomo exist to facilitate the sale of patents to the highest bidder. (31) In addition, online platforms have arisen in an attempt to connect buyers and sellers. (32) While some have failed, (33) others like the new IAM Market (34) have become quite successful. Today, an estimated twenty-five percent of patents offered for sale by brokers are listed by IAM, (35) and we anticipate that participation in online marketplaces will continue to grow in the coming years.

3. METHODOLOGY

   To learn more about the market for patents, we set out to identify as many patents as possible that were offered for sale on the brokered market between January 1, 2012, and December 31, 2016. To identify packages, we collected data from brokers as well as from online platforms. To collect data from brokers, we constructed and updated a list of known brokers and negotiated with each to obtain data on the patents...