In the last installment of Lightswitch, I wrote about patent trolls and specifically about Intellectual Ventures, one of the largest patent trolls in the world. For those that missed that article, a patent troll or “licensing firm” is a company that enforces patents with no intention of manufacturing, marketing, or using the patented technology. They threaten litigation; you pay them in the form of a licensing fee or royalty to avoid litigation.  

The prevalence of licensing firms and the threat they present has given rise to a business entity with an even newer business model - defensive patent holding companies. In general, defensive patent holding companies seek to minimize patent litigation by acquiring patents that might be asserted against their clients or members. These holding companies take aim squarely at licensing firms and openly criticize licensing firms’ litigiousness. For example, RPX Corporation, one of the largest defensive patent holding companies, declares on its home page: “Patent litigation used to be a form of legal redress. Now it is a business model.”

Defensive patent holding companies generally fall into one of two categories: independent patent holding companies, like RPX, and defensive patent pools, like Allied Security Trust. These two types of entities differ primarily in who decides which patents the firm acquires.

RPX provides a service designed to mitigate members’ litigation risks by purchasing patent rights on the open market. RPX members pay an annual membership fee ranging from $40,000 to $5.2 million depending on the size of the company. RPX decides which patents to acquire and targets patents representing a threat to a broad base of companies preferably across multiple industries.  

As you would expect, RPX provides its member organizations a license to practice the technology covered by the patents it acquires and promises never to sue or assert the patents in its portfolio. More interestingly, RPX does not increase the size of its membership fees based on the size of its aggregated portfolio of patents.  

In the last three years, RPX has invested more than $200 million in over 1,300 patents and patent rights, primarily in the mobile, internet search, and radiofrequency identification markets. Its members include some of the largest players in the high-tech field, including Barnes & Noble, Cisco Systems, Dell, eBay, Google, Microsoft, Motorola, and Research in Motion.  

Defensive patent pools on the other hand, like AST, are member-based patent trusts in which the members, not the company, decide on a case-by-case basis whether to contribute money and purchase patent rights. Members of the trust contribute funds and AST holds the funds in escrow for the purchase of patents. AST uses a particular member’s funds only to acquire patents that particular member is interested in acquiring. AST simply aggregates the funds and formulates the bid. The members involved in that particular purchase obtain a license to the patent. After a certain period time, the acquired patents are sold or donated. Although AST has far fewer members than RPX, AST members include some of the biggest names in high-tech including Sun Microsystems, Motorola, Hewlett-Packard, Cisco, and Google. As you would expect, like RPX, AST does not assert its patents against others.

These two entities both purport to have certain advantages over the other. For example, RPX claims that its strategy of deciding which patents to acquire, targeting patents relevant to more than one industry, and licensing all of its patents to all of its members is highly cost-effective. Moreover, RPX claims that, because its client pricing is separate from the actual value of the patents it acquires, its fees are significantly lower than the typical patent acquisition (and defense) costs a client would otherwise face.  

AST, on the other hand, claims that its structure – allowing the members to use their own expertise to decide among themselves which patents to acquire – taps into the intellectual wherewithal of the members collectively in a way that an entity like RPX is not capable. Critics of the patent pool model, however, question whether the individual members devote sufficient resources to evaluating patents in a timely fashion.

As corporations continue to seek ways to mitigate patent litigation expenses, it will be interesting to see how companies like RPX and AST evolve and if newer business models arise.