Guest Post by Prof. Michael Risch: The Securitization of Patents

Guest post by Michael Risch, Associate Professor of Law, Villanova University School of Law.

My forthcoming article in Duke Law Journal, The Securitization of Patents, argues that the best way to create patent markets might be to start treating portfolios as securities. A full draft is accessible at this SSRN page. The article makes four basic points:

  1. Aggregation and trading is not limited to non-practicing entities – everyone is doing it.
  2. Companies are trading aggregated patent portfolios as they do other patent instruments, either through sale or licensing.
  3. Aggregation is beneficial, even critical, for efficiency; this is directly contrary to the conventional wisdom.
  4. Based on the above, markets might be improved by applying securities treatment to patent portfolios.

[NB: I focus on portfolios, not individual patents. I also focus on sale and licensing of patents, not the initial patent grant. The paper explains why in more space than I have here.]

When I first wrote Patent Troll Myths, there was very little empirical data about NPEs. Since then, such research has exploded, with new data every week seemingly counting the number of NPEs and their cases. This data, though helpful, leaves a lot to be desired, I think. First, there is a rarely a real apples-to-apples comparison with the activity of product companies (and when there is, the comparison is not very granular). To that end, I’ve been developing a matched data set for my Patent Troll Myths data so we can test what real differences in quality and quantity, if any, exist. Second, the data largely ignores licensing practices, which can be quite similar. To be fair, licensing data is difficult to come by, but without it, normative determinations are difficult. Third, studies like mine, which look at the provenance of NPE patents, are rare.

These issues lead to my first point: aggregation is not just for trolls anymore, if it ever was. The public is becoming a bit more aware of this with new focus on privateering, the outsourcing of patent enforcement by product companies to licensing and assertion specialists. The idea that aggregation is just fine when a product company does it, but suddenly evil when those same patents transferred to a third party has never sat well with me. And regardless of moral considerations, the fact of the matter is that patent aggregation is everywhere.

My second point follows from the first: aggregated portfolios are being used as assets, and traded as such by all sorts of companies. This is nothing new; people have been writing about patents as a new asset classes for a while now. Transactions are getting bigger, however, and they are hitting the news. Perhaps no transaction better illustrates my point than the recent Kodak patent auction. First, Kodak offered its patents for sale as a financing strategy in bankruptcy. Second, the eventual buyer was a consortium including, among others, Microsoft (a product company); Intellectual Ventures (a licensing company, but also one that litigates, but also one that aggregates defensively; and RPX (a defensive aggregator). This one transaction is my argument in a nutshell: everyone is aggregating, and they are doing so in buy/sell type transactions for financial purposes.

My third point is that such aggregation is not always (or necessarily often) a bad thing. This is decidedly against the conventional wisdom. Companies with large portfolios surely have the ability to cause “royalty stacking,” but in practice this is less likely than if many separate parties enforced those same patents. Litigation looks much the same; regardless of the size of the portfolio, courts are just not going to hear a case asserting 1000 patents. Only a few (at most 5 or 10) patents will be at issue, and then the aggregator looks like anyone else. Similarly, in negotiations, the parties usually haggle over a few “lead” patents. This is little different than negotiation with the owner of few patents – with one big exception. When you come to terms with the aggregator, you can settle and license hundreds or maybe thousands of patents at once. Not so with single-patent owners. These folks line up one after another, asserting a few patents at a time. The biggest NPEs will often assert patents obtained by individual inventors; would product makers really rather that the inventors assert their own patents separately? Maybe, before a time when people figured out a viable mechanism for funding patent assertion, but now that individuals might seek funding for enforcing their own patents, a single aggregator must surely be a better option than many inventor plaintiffs.

There is one difference with aggregated portfolios, of course. When the parties are done haggling over the lead patents, the portfolio owner always has more to discuss while the small patent holder has none. But rather than being the greatest cost of the portfolio, a seemingly bottomless portfolio is its greatest benefit.

And that is my fourth point: when parties are trading portfolios, the haggling should be over price instead of quality and infringement. In a large enough portfolio holding patents directly related to a particular product, there will surely be some number of patents that are both valid and infringed. The question is how many, and how much it will cost to find them.  A central thesis of my article is that treating portfolios as securities will help lower transactions costs in a variety of ways by limiting the litigation costs of finding those infringing patents and instead better pricing patents in the market.  For you legal sticklers, I didn’t just make this up: the paper looks at portfolios under the Supreme Court’s famous Howey test and concludes that such treatment is at least plausible under the law.

How might securities laws benefit markets? Not in the traditional “public offering” way. I suspect that most transactions would be excluded from the registration requirements. However, such transactions might be regulated as dark pools, and require clearinghouse treatment that makes such transactions public. Further, stock fraud laws might require the disclosure of information that might affect portfolio value. For example, patent holders who know of anticipatory prior art might be required to disclose it rather than keep it secret. Perhaps most important, accepting that portfolios are simply financial transactions might drive efforts to develop objective portfolio pricing. The goal of such pricing schemes is to determine a portfolio’s price even though the parties cannot agree on the price of any of the particular patent in the portfolio.  I examine several pricing strategies that might work (and several destined to fail) in the paper.

There is obviously much more in this paper than I can write here. I detail my arguments in the full paper.

20 thoughts on “Guest Post by Prof. Michael Risch: The Securitization of Patents

  1. 20

    There is a list of NPEs that are publicly traded. It does not make sense to securitize patents as it would lock them into with a group of patents. For patents, that would lower the value of the individual patent. Makes no sense. Why do that rather than have a publicly traded NPE manage the patents?

    Our analysis includes the following companies: Acacia Research Group (ACTG), Asure Software Inc. (ASUR), Network-1 Security Solutions Inc. (NSSI), Opti Inc. (OPTI). Rambus Inc. (RMBS), VirnetX Holding Corp. (VHC), Vringo Inc. (VRNG), Universal Display Corp. (PANL), Document Security Systems Inc. (DSS), Worlds Inc. (WDDD), Democrasoft Inc. (DEMO), Pendrell Corporation (PCO), Parkervision Inc. (PRKR), and Unwired Planet Inc. (UPIP).

  2. 18

    class warfare

    My placing the appropriate name on what you were doing is not my doing it.

    Your examples of those with an agenda prove my point – not yours.

    You need to not only grow up, but stop drinking the Koolaid.

  3. 17

    Risch: For example, patent holders who know of anticipatory prior art might be required to disclose it rather than keep it secret.


  4. 16

    Worked great a few years ago when they did this in real estate.

    Indeed. And if only all those lazy d-mb people hadn’t taken out the absurd loans from the well-meaning innocent banks, everything would have worked out beautifully!

  5. 15

    Who “used” class warfare? Anon did.

    Who is not REAL in the world and should “grow up”?

    Google, Blackberry, EarthLink and Red Hat et al. I suppose.





    Submitted via email:

  6. 14

    It’s not a matter of “no such thang is possible,” as much as it is your use of it is juvenile, and reflects a lack of understanding of the complexity of the real world (and is, in fact mirrored in the FAILURE of communism to work in the real world).

    bcoi, please grow up.


  7. 13

    oh lawdy someone said “class warfare” and we knows no such thang is possible and whenz someone sayz it we knows dey is commies!

  8. 12

    As is true with any property: buyer beware.

    …unless you have something fundamentally against property, Apotu, (which you very well might).

  9. 11

    The logical conclusion here is that there is a growing incentive to get patents for something, anything, and as many as possible, no matter how narrow the claim scope. Aggregate them into a huge pile of worthless patents and pretend the pile is valuable because statistics. Then sell them to someone else and let them figure out how worthless they all are.

    Worked great a few years ago when they did this in real estate.

  10. 9

    Sure, right until the securities laws would need respecting.

    And treating them as such would CERTAINLY reduce patent litigation abuse and remove so much incentive for people to obtain and seek enforcement of broad and obvious patents.

    Unless checked, the whole game is leading (has led) to an endless and absurd merry-go-round of rent seeking by yet another parasite class feeding on the fewer productive elements of our society.

    The bar for that which is novel must be raised and the costs of bringing suit and losing as MOL must be raised before this idea would have real merit. And how long until that happens? It’s going the other way….

  11. 8

    So, maybe I am missing something, but patents trading would be considered a security if you sold a portion of your company to a non-exempt person.

    So, what are saying to add?

  12. 6


    Risch makes it sound like people are treating patents like (gasp) property.

    What is this world coming to?


  13. 3

    A security if:

    The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is speculative or non-speculative or whether there is a sale of property with or without intrinsic value. SCOTUS, Howrey.

    So, you want to put additional constraints on patents. The above is only true if they are aggregated and then someone else is managing the patent portfolio, which is IV which already is not a security but the investors are all excluded.

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