The Future of Patent Wars: More of the Same, but Less Litigation, Says John Amster of RPX

5/3/10Follow @gthuang

Intellectual property battles are a perennial hot-button topic in the tech world. Recently we’ve been hearing a lot about so-called “patent trolls,” companies that don’t produce goods or services but rather acquire patents and then try to extract licensing fees from firms they say are infringing on those patents. Most of these disputes involve lawsuits, and an increasing percentage of all patent litigation cases involve patent trolls—roughly 15 percent, according to some sources.

John Amster and his company, San Francisco-based RPX, are trying to do something about this. First, some background. Before co-founding RPX in 2008, Amster spent three years at Intellectual Ventures, the Bellevue, WA-based invention firm led by former Microsoft chief technology officer Nathan Myhrvold. Amster was IV’s general manager of strategic acquisitions and vice president of licensing, based in San Francisco.

Amster started RPX together with co-CEO Geoffrey Barker, another former Intellectual Ventures vice president of licensing, and Eran Zur, the firm’s president. RPX is focused on “defensive patent aggregation.” It buys up patents across a wide range of tech areas, including consumer electronics, mobile handsets, telecommunications, software, Internet, and e-commerce, and charges companies for access to the intellectual property. The idea is to take those patents out of the arsenal of patent trolls, and grant tech companies licenses to the IP stockpile so they can defend themselves more efficiently. Companies pay RPX an annual fee ranging from $40,000 to $5 million, depending on their size.

RPX has been on a tear lately, signing up big customers like Cisco Systems, IBM, Intel, Microsoft, Hewlett-Packard, Nokia, Sony, Samsung, LG, and HTC. A couple of weeks ago, the company announced it has added Dell and Acer to its list of “members,” which now includes 42 firms. So far, it has spent more than $200 million to acquire more than 1,300 patents. RPX is venture backed by Kleiner Perkins Caufield & Byers, Charles River Ventures, and Index Ventures. The company has 40-some employees—three in the Seattle area (including co-CEO Barker)—and it is actively hiring.

Some observers have called RPX a competitor to Intellectual Ventures, but Amster challenges that premise. “We’re completely different. We have two very different visions and goals,” he says. “[Intellectual Ventures] has raised a vast amount of money and has a very diverse set of businesses, from early-stage invention all the way through patents. It’s a totally different business-model vision. They’re a private equity fund for invention. The patent piece is small.”

I recently spoke with Amster by phone to hear about RPX’s progress against patent trolls, and to get his thoughts on where the marketplace for intellectual property is headed. To me, it’s really interesting that defensive “protection” companies are sprouting up to serve the tech community—and where is the line between defensive firms and the trolls?

Here are Amster’s responses to three of my questions, edited for length and context:

Xconomy: Tell me about your vision for RPX and how it’s unique in the world of technology and IP.

John Amster: The basic idea was looking at this problem of patent trolls, or non-practicing entities (NPEs). The difference between [the terms] “patent troll” and “NPE” is important. Why has this thing been phrased as a negative thing? Why is it pejorative? The philosophical view of a lot of companies is that something’s wrong with that. That’s not really true though—at the end of the day, patents are assets. The problem is not that patents are being monetized, it’s that they’re being monetized through litigation. That’s very inefficient and slow. We started RPX to create efficiency in this market.

NPEs are supported from capital sources to take the risk. Last year, 1,400 companies were hit with NPE cases. We can collect fees from those companies, and we can reduce the risk for those who are paying us money. We can commit to not [offensively] assert patents. We started 18 months ago, and we now have 42 clients. Nothing in the patent space has grown this quickly. Nobody has tried to do what we’re doing before. There have been bits and pieces, but nothing scalable and purely defensive. In almost all other instances, what people charge is based on the value of the patent they’re licensing. Ours is based on the size of the company. We’ve done something unique and risky, which is why we were venture backed. We priced it for scale. Our fee caps out at $5 million.

X: What did you learn from your time at Intellectual Ventures, and what’s the long-term outlook for RPX?

JA: I had a lot of experience going into Intellectual Ventures—more experience in monetizing patents without litigation. I had a good understanding of the value of patents and how to explain them, and an understanding of the intersection of finance and patents.

What [Intellectual Ventures] proved was there is a market for buying patents. And most people who own patents view them as inventions and property that they’re entitled to monetize, and willing to monetize without litigating. It was an interesting arbitrage opportunity. The market accelerated a lot because of what IV did. It’s not about punishing anybody, it’s about getting them paid.

[At RPX] people keep signing up. Early on, we didn’t have any patents; we had 16 customers in the first year. There is a real network effect. When we get customers in a certain area, the next one coming in is a lot less risky. We would be perfectly happy if we continue to grow the way we’re growing. We’ve achieved an important level of critical mass. What’s really important for us, and companies are starting to really see this, is we have a platform now. Because we are an independent participant in this market with our own capital, a very strong team, and clients, there’s a lot you can do with us. It’s about risk mitigation, and it’s a lot easier to do if you have scale.

That’s been terrific, but we’re also doing more creative things with our customers. We’re working on a variety of insurance things; we also have been successful in doing syndicated buys. The position we’re in as a market participant with these clients and [having] a good trusted relationship with them, we can use those relationships to get things done, whether it’s acquisitions or other things.

X: What are the most interesting trends you see in the patent marketplace, especially as relates to the Pacific Northwest (and IP-heavy companies like Microsoft, Amazon, and Intellectual Ventures)?

JA: From our perspective, there are no real trends in the deal flow. We see 50+ deals a month. There’s not a trend of, say, more handsets or touchscreens. It really varies. From our perspective—what’s of concern to our clients—we’re 100 percent not going to buy something on medical devices; but handsets, or features in PCs or TVs, we will.

A lot of the software patents seem to be related to things like security and e-commerce, secure transactions. Occasionally databases, or things that might arguably relate to social networks or targeting product offerings on an e-commerce site based on buying patterns. Hardcore software stuff we don’t see all that often, but some [digital rights management].

For a macro comment on the Northwest, I’d say NPE litigation and patent issues are always a hot topic. People complain quite a bit about them. People tend to look for a silver bullet—legislation, or a Supreme Court case. The trend to look for is, the more things change, the more they’re going to stay the same. There will be unintended and opposite changes in that regard. The vast majority of transactions involve litigation. Well over 1,000 companies were impacted by it last year alone. But it’s an anomaly that it’s all litigation-based. People think of that as the norm, but we’re about a market-based way to do it.

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com. Follow @gthuang

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