The Innovation Continuum: Putting Things in Perspective

At the recent NPE 2016 Conference in New York, a topic that came up repeatedly was the role that NPEs (or PAEs as the Federal Trade Commission calls them) play in the entire innovation experience – what we call in this article the “Innovation Continuum.” For the purpose of this article, we prefer the term “patent licensing company” to describe an enterprise that generates most of its income from licensing patents and other intellectual property.

First of all, let’s define the “assertion” in Patent Assertion Entity. The goal of any patent licensing company is to generate income by licensing its patents. At NPE 2016, we heard over and over again how patent licensing companies contacted infringers of their patents with the goal of working out a license, but their efforts were universally rebuffed, leaving them with no alternative but to assert their patents against the infringers. So clearly, assertion is not the goal. Assertion, in fact, is a subset of licensing.

There are many participants in the Innovation Continuum, and each has a role to play.

  • Independent inventors and institutional inventors (those who work for a business, university or other institution): Create inventions and file for patents on those inventions
  • Universities, research labs, hospitals and other innovation institutions: Employ the innovators who create inventions, and then file for patents on those inventions
  • Businesses of all sizes: Employ innovators who create inventions, file for patents for those inventions, and sell patented products to produce a return on their innovation investment
  • Patent practitioners: Help inventors, universities and businesses secure patents
  • Patent litigators: Assist patentees in the licensing of their patents, ensuring a return on the innovation investment of the patentee
  • Patent licensing firms (i.e., NPEs or PAEs): Provide liquidity for the asset class known as “intellectual property” and insure that a return is made on the innovation investment of the inventors and assignees of the patents it monetizes
  • Patent brokers: Connect sellers with buyers and licensors with licensees
  • Venture capitalists and private equity firms: Provide capital to fund technology-based businesses

The Innovation Continuum is a “continuum” because it has many steps that collectively create a total that is greater than the sum of the parts, and it has diverse elements that are all part of the whole but loop back on themselves as processes are repeated. The key element here is producing a return on the innovation investment.

  • An independent inventor files for a patent on his or her invention. As an independent inventor, he is both the inventor and assignee of the patent.
  • An institutional inventor – often a researcher, scientist, engineer or other professional – files for a patent on an invention, and the patent is assigned to his or her employer.
  • When a patent is assigned to a university, it seeks to license the technology with the goal of receiving a return on its innovation investment through licensing revenue. If a business infringes a university’s patent, the university will assert the patent to collect what is due it for the use of its intellectual property. Earlier this year, Carnegie Mellon won a multi-million dollar award from Marvel Technology for infringement of Carnegie Mellon patents by the semiconductor company.
  • When a patent is assigned to a business, the business “practices the patent” – that is, it produces a product that uses the invention covered by the patent. Part of the profit the business makes on the sales of its patented products produces a return on the business’s innovation investment. If a competitor of that business infringes one of the company’s patents, the company will assert the patent to collect what is due it for the use of its intellectual property. That is why Apple sued Samsung.
  • However, if a business receives a patent, but it does not practice the patent, what options does it have? Businesses change direction from time to time. A business might spend years developing technology in a specific area and filing for patents on that technology, only to find itself focusing on other technologies in other industries as markets, competition and opportunities change. In that case, a business will sell its patent to another business or to a patent licensing company, or partner with a patent licensing company to monetize its patents. The revenue generated by the sale of the patent or its monetization by the patent licensing company produces a return for the company on its innovation investment.
  • An independent inventor receives a patent, but without the means to produce a product that uses his invention, the inventor either sells the patent to a patent licensing company or partners with a patent licensing company to monetize his patent. The revenue generated by the sales or monetization of the patent produces a return on the independent inventor’s innovation investment.
  • The licensing fees collected by universities enable them to invest in additional research, develop yet more inventions, and file for patents on those inventions.
  • The profits on the sale of patented products enable a business to invest in additional research, develop yet more inventions, and file for patents for those inventions.
  • Revenue from the sale or monetization of unpracticed patents enables a business to invest in additional research, develop yet more inventions, and file for patents for those inventions.
  • Revenue from the sale or monetization of his patent enables an inventor to perform ongoing research, develop yet more inventions, and file for patents for those inventions.
  • Venture capital and private equity firms invest in businesses so those businesses can commercialize their technology – often covered by patents – and produce a return that funds additional innovation, produces a return for investors, and creates jobs for Americans.
  • When a start-up fails, the investor can often sell the patents to a technology licensing company to recoup a portion of its investment. In this element in the Continuum, the patent licensing company provides a key service – liquidity for an asset class.
  • A healthy demand for patents insures that patents have value, and that rewards innovation, and that, in turn, funds future research and innovation.

In this month’s IP News section of our Wealth of Ideas newsletter, there is an interesting article that illustrates just one element in the Innovation Continuum: Liquidity for the patent asset class. Two companies – Metaswitch Networks and Genband – sued and then counter-sued each other. And while these are both fine companies – and we totally support their defense of their intellectual property rights – it is interesting to note that of the seven patents that Metaswitch asserted against Genband, four were for inventions that Metaswitch did not develop in-house. Four of the seven patents were purchased from Nortel Networks. Of the seven patents that Genband asserted against Metaswitch Networks in its counter-lawsuit, only three were home-grown. Two were purchased from an inventor, and two from Data Connection.

Our point here is that since both Metaswitch Networks and Genband are market participants – and not NPEs – the “patent reformers” do not criticize their assertion of their patent rights. But Metaswitch’s and Genband’s willingness to buy patents to supplement their in-house intellectual property helped to maintain liquidity for an asset class that is critical to American innovation and American competitiveness in an intensely competitive global marketplace.

If our elected officials and the judges they appoint understood the Innovation Continuum, we would NOT have the weakening we have of intellectual property rights by Congress and the judiciary.