Intellectual Ventures: A genuine path breaker or a patent troll?

We wrote the other day about a device that kills malaria bugs with laser (“Killing Malaria Bugs Dead with Laser,” (17 February 2010 HSNW). The device was developed by Bellevue, Washington-based Intellectual Ventures, a secretive $5 billion investment firm that now owns 30,000 patents and which inspires both admiration and unease. The company’s 650 employees include scientists and engineers, and it has an in-house invention effort and lab that last year applied for 450 patents. To date, the company has paid $315 million to individual inventors.

The New York Times’s Steve Lohr offers a detailed discussion of the company in a lengthy article, and adds more comments in a blog entry. The company was founded in 2000 and began operating in 2003. It says it has returned $1 billion to investors and collected more than $1 billion in license fees to date. Most of the revenue has apparently come from sixteen so-called strategic investors — big companies that pay to license patent rights and get a stake in an Intellectual Ventures fund.

Lohr notes that Intellectual Ventures spent more than $1 million on lobbying last year, according to public filings compiled by OpenSecrets.org. In the three most recent election cycles — 2006, 2008, and 2010 — Intellectual Ventures executives, led by company’s founder Nathan Myhrvold, have contributed more than $1 million to Democratic and Republican candidates and committees.

Myhrvold, a scientist who led Microsoft’s technology development in the 1990s, outlined the company’s philosophy in a 7,000 word article, titled “The Big Idea: Funding Eureka!” in the March 2010 issue of the Harvard Business Review (sub.req.).

Lohr writes that the issues surrounding Intellectual Ventures, viewed broadly, are the ground rules and incentives for innovation. “How this plays out will be crucial to the American economy,” he quotes Josh Lerner, an economist and patent expert at the Harvard Business School as saying.

Myhrvold agrees. He says he is trying to build a robust, efficient market for “invention capital,” much as private equity and venture capital developed in recent decades. “They started from nothing, were deeply misunderstood and were trashed by people threatened by new business models,” he told Lohr.

Describing patents as “the next software,” Myhrvold argues that the patent world as a vastly underdeveloped market, starved for private capital and too dependent on federal financing for universities and government agencies, which is mainly aimed at scientific discovery anyway. Eventually, he foresees patents being valued as a separate asset class, like real estate or securities.

Critics say that if Intellectual Ventures is not exactly a patent troll, then some of its practices would resemble one. Lohr writes:

Several analysts say that Intellectual Ventures has been primarily a master practitioner of exploiting the current rules of the game to its advantage. Many companies in the patent field use shell companies to mask their activities, and Intellectual Ventures seems to employ them with uncommon frequency. A report last month by Avancept, an intellectual property consulting firm, said that up to 1,110 shell companies and affiliated entities appear to be linked to Intellectual Ventures. The secrecy, said Thomas Ewing, principal consultant for Avancept, makes it “far more difficult to confidently negotiate with Intellectual Ventures.”

In his blog entry, Lohr points out that Intellectual Venture may be a pioneer in an emerging field:

Intellectual Ventures will not rule out litigation, but says it would prefer not to. “It’s a stupid and inefficient way to resolve disputes, but in a polarized world, there will be litigation,” Mr. Myhrvold said.

 

In fact, the new breed of companies in the defensive licensing business, like Intellectual Ventures and Rational Patent Exchange (founded by a pair of ex-Intellectual Ventures licensing managers), have to hold out the threat of suing – and occasionally do it.

The suspicion in the technology industry, and pursued by specialized legal news publications, like The Recorder, is that Intellectual Ventures is essentially outsourcing its litigation. That is, it sells or licenses certain patents to shell companies and patent attorneys, and has agreed to share in the proceeds.