Ocean Tomo, NPEs and Patent Defense

In February 2008, Quito Enterprises, a non-practicing entity (NPE), purchased a patent on personal recommendation systems at the Ocean Tomo Live IP Auction for $1.2M. Quito subsequently filed patent infringement cases against 13 internet companies including Netflix, Amazon, Yahoo, RealNetworks, last.fm, Pandora Media, Slacker Inc., Veoh, Hulu, NBC Universal, CBS, News Corp., and Strands that use ratings based on user recommendations. Presumably, Quito will be seeking quite a bit more than $1.2M collectively from all the defendants. This NPE assertion was recently cited in support of the argument that Ocean Tomo’s auctions are aiding NPEs assertion and litigation efforts.

One byproduct of the increased secondary market liquidity provided by Ocean Tomo and other patent brokers is that NPEs have easier access to some patents. But operating companies also have the same purchasing opportunities as the NPEs. The secondary market growth is largely a reflection of patent owners’ desire to monetize their intellectual property assets without litigation. This desire, and new ability, on the part of patent owners to sell versus sue gives operating companies the opportunity to adjust their defensive strategies. Many companies with sophisticated IP organizations are already exploiting increased market visibility and liquidity by preemptively buying potentially threatening patents when they appear on the secondary market.

So, while increased secondary market liquidity exploited by brokers may aid NPEs in their efforts to find new patents to assert, it also brings new opportunities for operating companies willing to engage in proactive strategies to reduce their risk of NPE litigation. The Quito Enterprises case is a perfect example of why proactive buying can be a good defense. Each Quito defendant will likely spend more in the course of this litigation than the auction price for the patent.