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Exclusive: Intellectual Ventures curbs patent buying amid fund-raising effort

By Dan Levine

SAN FRANCISCO (Reuters) - Intellectual Ventures, a multi-billion-dollar firm that virtually invented a new market for patents and inventions, has curtailed its patent buying in the past few months, according to sources familiar with its patent market activity, as it seeks to raise new funds.

Created in 2000, Intellectual Ventures to date has raised about $6 billion and acquired 70,000 patents and other intellectual property assets.

The company is currently attempting to raise $3 billion more, according to an investor presentation reviewed by Reuters. Its last major investment fund closed in 2008, and it can no longer use that capital to buy new patents, say three sources with direct knowledge of that fund's terms.

Without a new fund in place, Intellectual Ventures has pushed back the closing dates on some patent deals in recent months and bowed out of others, according to IV purchasing contracts and half a dozen sources involved in patent transactions.

The company's buying slowdown has not damaged the overall patent market because other buyers have picked up the slack, said Robert Aronoff, a patent broker and managing partner of Pluritas in San Francisco. Still, "brokers will welcome them back in," Aronoff said.

Intellectual Ventures declined to comment on any aspect of its fundraising or business operations.

IV's fundraising comes amid a heated debate in Washington over whether current policies make it too easy for patent owners to extract large royalty payments, even in cases where the patented technology may not be central to a given product or service.

Companies like IV, which amass patents but don't manufacture products, have drawn special ire from tech companies and others who believe patent protection has gone too far and is stifling innovation.

Amid the policy debate, however, there has been little focus on the business performance of Intellectual Ventures, which like most private firms discloses little about its finances.

TECH COMPANY INVESTMENTS

Early backers of Intellectual Ventures included a number of technology companies, as well as institutional investors such as endowments and venture funds. The tech company investments often included licensing agreements enabling them to use patents held by IV.

It is not clear how close IV is to completing its new fund, or which type of investors might participate. Microsoft Corp, an early IV backer, has not invested in IV's new fund "at this time," spokeswoman Jennifer Crider said.

Google Inc, an early investor that in recent years has found itself opposed to IV in the patent policy debate, also said it will not participate.

"We joined Intellectual Ventures' first fund as a way to defend ourselves against unjustified patent claims," Google spokesman Matt Kallman said. "Once we came to understand IV's operating model, we didn't join its later funds."

For years IV executives said litigation was not a major component of its strategy and that it simply sought fair licensing terms. Intellectual Ventures, however, has sued companies for patent infringement with much more frequency since 2010, including more than a dozen banks this year, according to court records.

Intellectual Ventures sued Motorola Mobility for patent infringement in 2011 after Google announced it would acquire the company. That litigation is still pending.

One of IV's early tech company investors, the chip design firm Xilinx, sued IV in 2011 after Xilinx refused IV demands to license additional patents, according to court filings. Xilinx's attempt to invalidate those patents in court is still pending.

Apple Inc, which has also invested with IV, did not respond to a request for comment.

The IV investor presentation reviewed by Reuters shows that at the end of last year, the average rate of return for IV's 2003 fund was 16.2 percent, while the 2008 fund stood at 2.5 percent. In a court filing in August, Intellectual Ventures said it has earned more than $3 billion to date in licensing fees.

One view of how this has played out for institutional investors can be seen in results from the University of Texas Investment Management Company, which is required by state law to disclose its investments and financial returns.

UTIMCO invested $50 million in Intellectual Ventures' 2008 fund. By the end of May 2013, IV had returned 31 cents on the dollar to UTIMCO, which ranked it 22nd out of 38 on cash returns among all of UTIMCO's 2008 private investments. The value of UTIMCO's stake in IV declined more than 4 percent since 2008, putting it fifth from the bottom among UTIMCO's 2008 deals.

INVENTING THE PATENT MARKET

The brainchild of Nathan Myhrvold, a colorful one-time chief technology officer of Microsoft whose interests range from authoring cookbooks to collecting dinosaur bones, Intellectual Ventures from its inception 13 years ago has brought a new vibrancy to the staid patent world.

Companies once routinely entered into broad cross-licensing deals enabling them to use one anothers' inventions. But Intellectual Ventures turned the field upside down with a business model based on acquiring patents and then seeking royalties from companies that wanted to use them.

The approach was welcomed by many at the time as a way of assuring fair value for inventions and creating liquidity in a market that had been largely controlled by the big tech companies. But it has become increasingly controversial in recent years as a variety of businesses increasingly confront demands for patent royalties.

Critics say many patents are far too broad, and often cover software functions that are quite different from the mechanical inventions that were once the main focus of patents. The standard 20-year patent protection period is also viewed as too long by many in the fast-changing tech industry.

Industry groups such as the Computer and Communications Industry Association, which counts Google, Facebook Inc and other tech companies as members, are pushing Congress to make it harder for IV and other patent holders to pursue infringement claims and win big royalty payments. One proposal would make it easier for defendants to recoup legal fees if they fight a patent lawsuit and win.

The policy debate could have an effect on IV's fundraising efforts, said Robin Feldman, director of the University of California Hastings Institute for Innovation Law.

"If you are a risk averse investor in uncertain political terrain, it's far less appealing," Feldman said.

Until this past summer, Intellectual Ventures could use capital from its 2008 fund to buy patents. But that fund had a five-year acquisition period, which is now expired, say three sources familiar with the terms.

That led IV to begin inserting an unusual clause in its patent-acquisition contracts: a waiting period of up to 120 days from when due diligence is completed to the actual transfer of funds.

A contract containing such language, presented in late spring, was reviewed by Reuters. Six sources involved in patent transactions said sellers were told the waiting period was included because the latest Intellectual Ventures fund had not yet been completed. By comparison, an IV sales contract from 2007 reviewed by Reuters contained only a 30-day waiting period.

It is unclear whether any sellers have pulled out of their IV deals because of the delays.

"This is not an enviable position," said Feldman, as the waiting period adds risk on both sides of the transaction - potentially requiring both buyer and seller to forego other opportunities to keep the deal alive.

(Editing by Jonathan Weber; and Grant McCool)

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