Making a Market: Defensive Patent Aggregation Turns One Year Old

A year ago, building a broad patent portfolio to serve as a defensive strategy was an innovative idea that generated more questions than answers. Could such a portfolio acquire enough patents – and enough of the right patents – to be effective? Would the ROI on avoiding legal action be financially compelling?Would enough members join to provide critical mass?

Twelve months later, the answer to those questions is very clearly “yes.” Leading technology companies dependent on IP have embraced the concept of preventing patent assertions before they begin. And this market acceptance has allowed the first large-scale defensive portfolio to grow quickly and achieve the scale needed to provide effective protection.

Since introducing its pioneering Defensive Patent Aggregation service on November 25, 2008, RPX Corporation has already acquired more than 1,000 US and foreign patents, licenses, and rights. The company is the first participant in the secondary market to buy patents for purely defensive purposes, and by doing so RPX has established two important new realities about the IP market.

First, patent owners are clearly willing and ready to sell their assets for a current fair-market valuation rather than go through a time-consuming and costly legal process with an uncertain financial outcome. Defensive aggregation has proven a very viable option in the secondary market.

Second – and most important – the rapid scaling of the Defensive Patent Aggregation service has demonstrated that a neutral central clearinghouse, acting on behalf of multiple beneficiaries can provide both broadly effective protection and compelling economies of scale. By supporting the defensive model with subscription fees (which are far lower than the typical annual cost of dealing with assertions), the pooled resources of RPX members are making a highly capital-intensive market possible while simultaneously reducing their own operating costs. They are also fundamentally changing how other companies facing NPE threats now view the problem – it has become a market solution rather than a legal solution.

Today, one year after launch, RPX has signed 20 members on four continents. It has invested $115 million to build its unrivaled defensive portfolio using its rapidly growing base of membership revenue and capital from investors Kleiner Perkins Caulfield & Byers, Charles River Ventures, and Index Ventures. (Charles River Ventures has described RPX as generating higher revenues in its first year of operations than any other early-stage startup in CRV’s history.)In 2010, RPX expects to achieve profitability on both a GAAP and cash basis while continuing its current rate of investment in its Defensive Patent Aggregation portfolio.

The market is still in its infancy and the defensive aggregation model is likely to continue to evolve. Other participants in the patent market have begun incorporating defense into their business models. Nonetheless, in twelve short months it has become clear that Defensive Patent Aggregation is an idea whose time has come and that the market has adopted this practical and sustainable approach to mitigating the risks of patent litigation.