(1) How would patent assets be placed on the exchange? (2) How would they be classified? (3) How many shares would be attributed to a given patent within a technology class? (4) How would we initially value them? (5) What market forces would affect value of the patent shares? (6) If I own a technology share (used interchangeably with patent share), what exactly do I own and what can I do with it? (7) What would incentive trading on the patent shares? (8) What would incentivize collaboration amongst market players?

In this post, I’ll be discussing (8) collaboration amongst market players.

Licensing activity and its resulting revenue are key driving factors behind patent valuation.

Instead of using litigation or its threat as a first resort to licensing discussions, how can we incentive companies to take licenses from one another, without the threat or use litigation?

Let’s take Apple and Samsung as a case study—according to my sources, they hate each other.  Let’s say Apple takes agrees to take a license and pay royalties into Samsung’s mobile-device technology class.

What will this do for Samsung’s technology class?

Demand would skyrocket because it has a license from one of the market leaders and is generating royalty revenue.  This will increase the value of Samsung’s technology class.

How does Samsung repay the favor?

It can likewise take a license and pay royalties into Apple’s mobile-device technology class–this will increase Apple’s share value of its technology class.

Hence, we have a scenario where two market players are incentivized to help one another by taking licenses to each other’s respective technology classes.  By aligning incentives in such a manner, we can create a collaborative culture of licensing, rather than antagonistic approach currently employed today.

(1) How would patent assets be placed on the exchange? (2) How would they be classified? (3) How many shares would be attributed to a given patent within a technology class? (4) How would we initially value them? (5) What market forces would affect value of the patent shares? (6) If I own a technology share (used interchangeably with patent share), what exactly do I own and what can I do with it? (7) What would incentive trading on the patent shares? (8) What would incentivize collaboration amongst market players?

In this post, I’ll be discussing (7) demand for trading shares.

What would incentivize trading on technology shares?  What would peak a buyer’s interest to purchase shares?

1. Commercialization activity

Commercial activity of products and services associated with a technology class indicates that the technology class has market relevance and penetration potential, thereby increasing demand.

Commercialization activity also enables speculation regarding the potential success of the products and services associated with the technology class, thereby promoting trade activity.

Examples of commercial activity includes launches, improvements, and sales of products and services associated with the technology class.

Why would we tie share value to commercialization activity?

Tying the two enables a monetization system that promotes commercialization—this furthers the Founding Fathers’ intent behind the Constitution’s Patent Clause.

2. Licensing activity

If market players take a license to the technology class, this is the strongest indicator of market relevance and penetration potential for the technology class.

Moreover, if competitors are paying royalties into the technology class, then this would enable shareholders to earn a return on their shares, further increasing demand for the class.

Examples of licensing activity include licensing discussions amongst market players and litigation activity associated with patents in the technology class.

(1) How would patent assets be placed on the exchange? (2) How would they be classified? (3) How many shares would be attributed to a given patent within a technology class? (4) How would we initially value them? (5) What market forces would affect value of the patent shares? (6) If I own a technology share (used interchangeably with patent share), what exactly do I own and what can I do with it? (7) What would drive trading on the patent shares? (8) What would incentivize collaboration amongst market players?

In this post, I’ll be discussing (6) share ownership.

If you own a share of a technology class, then you are a shareholder of that portion of the class.  If you own 100% of all the shares, then in theory you could dedicate the entire technology class to the public and liquidate all its assets.

This raises a question regarding control of the technology class.  Who will make controlling decisions for the technology class?  Should it approach a company for licensing discussions?  Should it sue?  Should it settle?  What products and services are being produced on the technology class?  Should there be more research and filing directed to a technology class?

Similar to a public company, shareholders may collectively elect directors to make high-level decisions for the technology class.

And similar to public company stock, shares may be categorized as voting and non-voting shares.  We will be discussing this more in later posts.

(1) How would patent assets be placed on the exchange? (2) How would they be classified? (3) How many shares would be attributed to a given patent within a technology class? (4) How would we initially value them? (5) What market forces would affect value of the patent shares? (6) If I own a technology share (used interchangeably with patent share), what exactly do I own and what can I do with it? (7) What would drive trading on the patent shares? (8) What would incentivize collaboration amongst market players?

In this post, I’ll be discussing (4) & (5)–share valuation.

How would we initially value a share within a technology class?  What market forces would affect that value?

Let the free market dictate each exchange’s valuation techniques to determine a suggested price listing for shares of its listed technology classes, and let the market judge that exchange’s reliableness.

But each exchange must conform to minimum valuation standards.

What are those valuation standards?  How do you determine the value of a share?

In its most basic terms, the value of a technology share is what a buyer is willing to pay for it.

Thinking of it from the buyer’s perspective, what valuation metrics would a buyer use to measure share value for a technology class?

Before purchasing a share of a technology class, below are questions a knowledgeable buyer would ask and answer, keeping in mind that the shares are backed by patent assets.

1. Are there products or services in the market that embody the patented ideas?

This is the threshold question to valuing any patented idea.  If there is an actual product or service that exists and incorporates a patented idea, then the patented idea’s value has realized at least some of its potential.

If there is no commercial adoption at a given point-in-time, then the patented idea’s value is potential value.

2. If there is no product or service in the market, how do you value a patent asset’s potential value?

Some guideline questions: (a) Is there a perceived chance of success of commercial adoption of the patented idea?  (b) Is there a market player in the planning and preparation stages of launching a product or service adopting the patented technology?  (d) Are there research-and-development (R&D) efforts devoted to commercializing the patented idea?  (e) If so, how much and what percentage is it of the company’s overall R&D budget?  (f) Does the product or service appear to be a central one to the company?

Trading on a patented idea’s potential value enables the free market to determine the value of an idea–this doesn’t yet exist today.

3. If there is commercial adoption:

(a) What is the overall revenue of those products and services?  (b) What apportionment of overall revenue does the patented idea contribute?  E.g., is it just a feature-of-a-feature or is it a core feature that drives sales? (c) What are the profit margins for the product- or service-in-question, and what would an appropriate royalty rate be for continued infringing use?

4. What is the nature of the patent activity for the patents in the technology class?

(a) How many patents does the technology class include?  (b) How many patent applications?  (c) Is the absolute number of patents and applications trending upwards or downwards?  Are patent filings increasing or decreasing?  Are there more patents being filed then there are patents expiring?  Are the patent maintenance fees being paid?

5. Do market players acknowledge using the technology covered by a technology class?

Do they have a license to the technology class?  Are they paying royalties into the technology class?  What are royalty amounts?  What are the respective apportionment and royalty rates? What are the sales and revenues of those products and services?

6. If there is no licensing revenue, is there a possibility that a market player is practicing and that it should pay a royalty?

This is where we take into account the dynamics of the risks and rewards of an infringement allegation in the litigation context, and account for them into each exchange’s proprietary litigation algorithm–an algorithm to encapsulate the dice rolls of jury verdicts and judicial rulings, accounting for each side’s respective legal burdens of proof.

The output of such an algorithm would be an indexed number for the technology class that measures the chances of success that a court would rule in its favor on an infringement claim against a particular product or service.

Each case is highly fact specific and highly volatile, and these algorithms will be tested and refined over time, particularly as patents rated by the algorithm are tested in actual litigation at various points.

Why encapsulate potential litigation-outcomes into algorithms?  Using an algorithm converts limited judicial time and resources into a software output that enables market speculation and trading.

And if the patent is actually litigated, the algorithm weights would vary as litigation milestones are reached, potentially creating volatile side-markets.

And lastly, if a technology class is experiencing trading due to infringement speculation based on activity of a particular market player, then this would flag an opportunity for cross-licensing discussions.

Regarding why parties would be incentivizied to engage in cross-licensing activity on the exchange, we’ll be discussing this in a subsequent post in this series.

(1) How would patent assets be placed on the exchange? (2) How would they be classified? (3) How many shares would be attributed to a given patent within a technology class? (4) How would we initially value them? (5) What market forces would affect value of the patent shares? (6) If I own a technology share (used interchangeably with patent share), what exactly do I own and what can I do with it? (7) What would drive trading on the patent shares? (8) What would incentivize collaboration amongst market players?

In this post, I’ll be discussing (3) share division per technology class.

Each patent exchange may have its own share-division conventions, but they should conform to minimum standard requirements.

When attributing a number of shares to a given technology class, what should we take into account?

We’ll need to account for statistical factors and incentivization factors.

Regarding statistical factors, we’ll need to take into account the following:

(a) Number of patents: The total number of live, issued patents in the technology class.  This will be changing over time as patents issue and expire in the technology class.

(b) Patent-asset type: It could be either a Utility, Design, Plant, or Reissue patent.

(c) Total number of claims: Claims define your property right.  You can read more here http://www.investinip.com/patent-basics-what-is-a-patent/.

(d) Claim type:  A claim could either be an independent claim, dependent claim, or multiple dependent claim.  Some could argue there should be no share difference based on claim type, because each claim is in its essence an independent claim.  True, but the USPTO charges different amounts based on claim type it issues.  (If you are interested in learning more about these, let me know.)

Based on the above factors, an exchange would issue you a number of shares for your technology class-of-assets.

Regarding incentivization factors, the exchange would need to create enough shares off of a single patent asset to enable time-staged sales of technology assets.

Why would we want time-staged sales?

Let’s say Samsung is issued 10 million patent shares in its mobile-device technology class.  And let’s say it places 1 million shares, or 10% of the technology class, onto the exchange for sale off of the exchange and into the hands of patent traders.

Once these shares are on the market, the shares will go through price discovery, which is the process of determining the market value of an asset in a free market, through the interactions of buyers and sellers.

If Samsung sold its 1 million shares at $1 per share and share value increases to $3 after some trading of activity, Samsung can sell another 5%, 10%, 20%, etc. of its class onto the exchange at that newly-discovered price.

In this scenario, Samsung would be incentivized to engage in activities that would promote the value of its technology shares.

What activities would those be?  We’ll be discussing that in the next post.

(1) How would patent assets be placed on the exchange? (2) How would they be classified? (3) How many shares would be attributed to a given patent within a technology class? (4) How would we initially value them? (5) What market forces would affect value of the patent shares? (6) If I own a technology share (used interchangeably with patent share), what exactly do I own and what can I do with it? (7) What would drive trading on the patent shares? (8) What would incentivize collaboration amongst market players?

In this post, I’ll be discussing (2) technology classifications.

The first thing you’ll need to do is classify the technology class-of-assets.  We discuss that more here (http://www.investinip.com/patent-exchange-supplying-the-market-part-3ii-of-x/).

From the perspective of designating a technology class and selecting which patent families will belong to what class, remember that investors will be looking to see how well you maintain your technology class-of-assets.

Are you letting them expire?  Are you paying the maintenance fees?  Are you filing additional patent applications into the technology class?  Is the number of patents in the portfolio increasing, decreasing, or remaining stable?

All these factors affect investor perception as to how much you value your own technology class.

Be sure to designate the technology classes broadly enough in areas where you are actually interested in continuing to research and maintain patent activity.

And depending on the particular patent exchange, naming conventions will become standardized.  This will enable patent traders to juxtapose similar technology classes amongst competitors and select which shares it would like to purchase (e.g., Amazon’s mobile cloud-computing technology class v. Oracle’s mobile cloud-computing technology class).

(1) How would patent assets be placed on the exchange? (2) How would they be classified? (3) How many shares would be attributed to a given patent within a technology class? (4) How would we initially value them? (5) What market forces would affect value of the patent shares? (6) If I own a technology share (used interchangeably with patent share), what exactly do I own and what can I do with it? (7) What would drive trading on the patent shares? (8) What would incentivize collaboration amongst market players?

In this post, I’ll be discussing (1) how patent assets would be placed on the exchange.

(1) Exchange Placement

There should ideally be no barrier, other than administrative work, to place your patents on a patent exchange.

Whether you are a startup company seeking venture-capital funding, a university investing in a particular area of research, a company having foothold in the market with its products and services, or simply an individual inventor, anyone and everyone should have access to list their patent assets onto a particular exchange, each patent asset being designated to a particular technology class.

Also, regardless of whether or not you have funding, anyone and everyone should have access to place their patents on the exchange, with the hope of attracting higher market value and trading on the assets.

Once on the exchange, patent traders would see listings and then place bids on shares of the technology classes.

If a patent holder seeking funding can promote trading on its assets, it can take that to investors as validation that the patented ideas have market potential and demand.

IPXI’s exchange is no different from patentauction.com or some other clearinghouse to sell licenses and equity in portfolios.  IPXI’s model is the same solution we’ve seen over and over again, and is fact no different than a litigation-driven model.

Don’t be fooled–the IPXI’s patentauction.com model is not based on open, free-market principles.  Instead, it is based on a closed, monopoly-driven principles.

(1) Monopoly-Driven Principles

The only ones incentivized to purchase a Unit License Right (ULR) from IPXI’s exchange would be those that potentially infringe.

But why would a potential infringer want to pay for the ULR, if no one is threatening that they actually infringe?  And if the potential IPXI buyer could potentially keep doing what it’s doing, avoid paying a royalty, all while having no one complain, it would clearly be incentivized to not raise its voice regarding its “desire” to purchase a ULR.

(2) Closed Market

Moreover, IPXI’s exchange is a closed market, because only a particular segment of the population (potential infringers) would be interested in purchasing a ULR.  The general investment community has no incentive to purchase a ULR.

IPXI’s exchange, our current litigation-driven system, and all other closed, monopoly-drive models fail to (1) enable participation from the general investment community, and (2) promote investments into technology, both as a market and asset class.

→ On the other hand:

An open, free-market patent exchange would incentivize non-infringers and, any investor for that matter, to purchase shares of technology-classified, patent-backed assets.  For example, you’d be be incentivized to invest in a technology sector, if you believe it will explode in the marketplace, and more particularly if you believe you have inside knowledge re the technology’s potential impact.  After the technology explodes, you’d be able to sell your shares for much higher than the amount you purchased them.

Take away: when you see the words “patent exchange” used freely over the Internet, discern whether those models are closed, monopoly-driven principles, or open, free-market ones.

If patents are inherently wasting assets, then why would an investor purchase shares of a patent?  Namely, if the investor sits on them, they will become worthless.  And if the investor owns shares that will expire in six months, then how can the investor sell them for full value?

The answer lies in the classification of the investment vehicle—it is the underlying technology, not just the underlying patents.

To illustrate, if Cloud X, Inc. puts its cloud computing portfolio on the exchange, investors would invest in the clouding-computing technology class.  If Cloud X continually invents and files patents to add to the technology class, then the technology class will remain active, and investors are incentivized to invest in companies that invest in their own IP.  But if Cloud X neglects to actively invent and file in the technology class, then the technology class would be wasting and investors would be disincentivized to invest.

By properly designating the investment class as the underlying technology as opposed to the patents themselves, this (1) overcomes the wasting-asset issue, and (2) creates an incentive for patent owners to continually invent and file patent applications in technology classes placed on the exchange.

Q: Should investment in traded patents provide immunity from suit?

No.  If investment in a traded asset provided immunity to infringement, then Apple would be incentivized to buy one share on every technologically-related asset, and freely infringe them  without paying a fair royalty.

Q: Should investment in a traded asset offset damages-related infringement liability?

Investment in a traded asset should offset damages-related infringement liability.  Namely, if Apple owns 10% of the financial interest on a traded asset, due to it owning 10% of the traded assets, shouldn’t it receive 10% of the financial return on the asset when monetizing it through traditional means, even if a portion of that revenue comes from Apple itself?

This seems like a natural corollary to Apple owning 10% of the asset’s financial interest.

This scenario provides an ideal incentivization structure:

From the infringing entity’s perspective, this incentivizes such entities to own shares of assets it believes it is infringing—this would proportionally reduce its own infringement liability.  Further, it would provide such entities with a means to profit as the asset is monetized on its competitors.  Hence, infringing entities are incentivized to own shares of assets it believes it infringes.

From the patent supplier’s perspective, the more shares infringers purchase on the asset, the more revenue the patent will generate directly from those infringing entities.  This provides the patent supplier with revenue directly from potential infringers.

Therefore, offsetting damages-related infringement liability through investment in a traded asset provides an incentivization structure that benefits both patent suppliers and infringing entities.