By Daniel H. Sherr
This article is an introduction to the exciting and evolving area of patent transactions. To put things in a broad general perspective, patent transactions are essentially a hybrid of engineering, law, and good old-fashioned business. Although Patent Transactions are relatively invisible in the economy, they are an emerging topic in the business, technology, and law communities that is attracting media attention in major news outlets.
I: Current Patent Transaction Environment
Patent transactions have received a lot of attention recently. A major reason for this is because there were two mega-patent-transactions in 2011, the Smart Phone Wars and the impressive market caps for two publicly traded companies (Acacia and RPX). The two mega-patent-transactions are (1) the sale of the Nortel patent portfolio for $4.5B to a consortium of smart phone manufacturers and (2) Google's stock acquisition of Motorola Mobility for $12.5B.
Nortel Patent Sale to Rockstar Consortium out of Bankruptcy
Starting out with the Nortel patent transaction, in June 2011, Nortel sold its remaining patent portfolio to a consortium of non-Android phone manufacturers using a proxy company, Rockstar Consortium. The Rockstar Consortium included Apple, Microsoft, RIM, Ericsson and Sony. At this point, Nortel is a defunct multinational telecommunications equipment manufacturer headquartered in Ontario, Canada, at the end of a historically complex bankruptcy proceeding that is expected to result in the complete and formal demise of Nortel.
This unfortunate demise of Nortel is a result of a decade of decline, which started with the dot-com bubble bursting in late 2000. In a short two-year period, Nortel's market capitalization dropped 98.7% from CAD $398B in September 2000 to less than CAD $5B in August 2002. Followed by accounting scandals and the Great Recession, there was no way that Nortel itself could survive; however, its significant patent rights did.
III: Evolution of the Non-Practicing Entity
There are clear challenges for manufacturers and service providers to utilize patents aggressively due to their own patent infringement liabilities (and other reasons). However, there is another class of patent owners called non-practicing entities, which do not have the same disadvantages and aggressively utilize patents for monetization.
Explanation of an NPE
Non-practicing entities are often referred to as NPEs or "patent trolls." Many people in the patent transaction community take great offense at the word "patent troll" and aggressively interject the acronym NPE as often as possible. Although the term "patent troll" does not appropriately represent the role of NPEs in our society, the term grabs more attention and imagination than the term "non-practicing entity" or its acronym "NPE." However, as a natural development, the term "patent troll" carries less of a negative connotation than it used to.
NPEs are companies that do not sell products or services that are infringing on patents. For simplification, the only substantial assets that an NPE owns are patent rights intended for monetization. Unlike a manufacturer that makes products, an NPE does not have any patent infringement liabilities itself, thus making aggressive utilization of its patent rights more practical since there is a very low chance for a two-way patent litigation. In many instances, NPEs purchase patent rights from others, but some NPEs are former manufacturers that are enforcing patent rights after having ceased its own manufacturing activities.
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