The “Free Rider” Fallacy

As the practice of defensive patent aggregation continues to gain traction in the IP market, some observers have suggested that there is a flaw in the RPX business model: the apparent opportunity for non-member operating companies to “free ride” on the protection against assertion and litigation that is being paid for by members of the buying group. But the free ride is a fallacy; the protection doesn’t really exist.

The error that free riders would make is assuming that any patent purchased into the defensive portfolio will provide broad, ongoing, and unlimited protection against assertion of rights. This is not always the case. RPX often makes purchases with clearly delineated scope of ownership – partial patent rights or sub-licenses rather than entire patents – that is customized to the specific defensive needs of members.

RPX may also purchase a full patent or family of patents, but then quickly sell off rights to key aspects of the IP not germane to members’ operation. Similarly RPX may choose to sell entire patents back into the market after a limited holding period. This is part of the strategy at RPX since members retain a perpetual license to any patent that is purchased during their time as members. Such ongoing protection would not benefit any company choosing to free ride.

In addition to being a flawed method for reducing the risk of NPE assertion, free riding also precludes companies from gaining the broader strategic benefits of membership. RPX has deep knowledge of the IP market, and can offer insight on valuations, pricing trends, visibility on high-value or high-risk assets coming into play. The competitive edge that comes from that kind of knowledge is available only to members working closely with the aggregation team.

It is also worth noting that beyond the demonstrable disadvantages of free riding for the companies that risk it, there are broader and equally compelling negative effects that would result if free riding were to become commonplace. Defensive aggregation is a new and potentially game-changing way to limit or eliminate the threat of NPE-driven legal attacks. The foundation of building broad-based and broadly effective defensive patent portfolios is broad participation by operating companies.

As has already become evident, even a limited number of participating members can generate sufficient capital to take many actionable patents out of circulation. But the number of such patents is large and continuously growing. It will require a correspondingly large pool of money to purchase patents on the scale needed to succeed.

Free riding limits the number of participants in defensive aggregation and the amount of capital that can be deployed by RPX and other aggregators.Membership fees from large, market-leading technology companies have already made defensive aggregation a potent tactic to limit the scope and negative impact of NPE assertions. But to fundamentally change the dynamics of how IP assets are bought, sold, and used (or not used) as legal weapons, a broader collection of large and small fee-paying members will be needed for aggregators to have the economic resources that can clearly and consistently dominate acquisitions activity in the IP market.