Nice startup you have there...

November 11, 2014 3:39 PM

"Defensive patent aggregator" RPX have a new line of business: selling patent troll insurance to startups.
posted by Artw (21 comments total)

That's beautiful. Brings a tear to my eye.
posted by Tell Me No Lies at 3:45 PM on November 11, 2014

("tear" as in fishhook, not crying)
posted by Tell Me No Lies at 3:45 PM on November 11, 2014 [4 favorites]

The company stays in control of its case, but there are "controls in the policy" regarding how it can react to an offer to settle. "This isn't a line of credit," said Scola. "If you want to make a statement to the NPE community, and fight to the death—that's not what we're doing."

So, yeah, this is "we'll negotiate with them and scare them off". This is pretty much the nail in any "To promote the Progress of Science and useful Arts" argument for patents.
posted by straw at 3:56 PM on November 11, 2014 [1 favorite]

"This isn't a line of credit," said Scola. "If you want to make a statement to the NPE community, and fight to the death—that's not what we're doing."

Then what's the point? The settlement numbers I tend to see for these trolls are under the yearly premiums from RPX. If it was insurance to help you shut down a patent troll, then more power to them. But if all they're doing is helping you negotiate a settlement, then fuck 'em.
posted by Hactar at 3:58 PM on November 11, 2014 [2 favorites]

As awful as the need for this kind of insurance is, it seems on first blush like a useful thing for a tech startup. $10,000 a year to eliminate one completely insane variable risk you have no control over? I guess the real question is how good the insurance is and just what definition of "patent troll" they're using to determine if a suit is covered. Also the quality of their legal team.
posted by Nelson at 3:59 PM on November 11, 2014

Eh, they're just casting about for diversified revenue in light of the steadily decreasing value of patents. The number of suits being filed is dropping even as the number of patents in force increases, and the courts, Congress, and (to a lesser extent) the PTO show no sign of reversing the steady anti-patent trend of the past 8 years or so.
posted by jedicus at 4:04 PM on November 11, 2014

People have seen some things I've been working on. Many of them say I should patent things. Over and over I've had to explain that patents are almost always a fool's errand

Trade secrets have real value. Patents no. Hell, look at all the patent "service" ads on TV. The whole system is a cesspool.
posted by yesster at 4:32 PM on November 11, 2014 [1 favorite]

I want to see this as a cynical predatory move, but honestly it just seems like a needed service. Not every company is going to need it obviously, but some are more "when, not if" with respect to patent trolls. if I were legal counsel at a high-profile software/web/social/etc. company I'd at least investigate it as an option.
posted by naju at 4:34 PM on November 11, 2014

I'd be willing to buy this service if they would go thermonuclear with the trolls, because that would actually change the economics of patent trolling.
posted by grudgebgon at 4:46 PM on November 11, 2014 [1 favorite]

That's not true at all b1tr0t. A classic patent shakedown is "pay us $250,000 or we'll sue you". Startups faced with that question are in a very awkward spot. Having lawyers on hand to answer that kind of letter with a possible response could be very valuable. $10,000 a year is incredibly cheap compared to what it'd cost to have your own lawyer answer.

I worry more it's too good a deal. I'm wondering what their own modelling of the risk is, how that $10,000 works. I suppose there's efficiency in a firm consolidating patent defense for a bunch of clients. And of course RPX has its own arsenal to fight back with, although I'm guessing this low-cost buy-in doesn't get you access to that.
posted by Nelson at 5:01 PM on November 11, 2014 [1 favorite]

It's insurance. You're paying to eliminate surprises. You've got to have a lot of potential surprises to justify a $25k deductible, but if you're in an industry like voice recognition or video codecs, you might need it.

It sucks that this needs to exist, but once it gets going anti-patent people can spin it as "look how much startups pay in insurance! unacceptable!" and pro-patent people as "boo-hoo, startups have to pay insurance, welcome to the world of slippery floors, buddy." Guess we won't know who wins the argument until we know how much it costs on average.
posted by RobotVoodooPower at 5:06 PM on November 11, 2014

The software patent is the only example I can think of where I'd be okay with a Republican congress drowning some form of government in a bathtub. Of course the chances of that happening are probably nil.
posted by Rhomboid at 5:27 PM on November 11, 2014

Couple of wrinkles of course. They get to define what an NPE is, for example.

Then what's the point? The settlement numbers I tend to see for these trolls are under the yearly premiums from RPX.

No different than any other insurer who is obligated to defend you against a 3rd party - homeowners, auto, whatever. They stand in your shoes so they decide when to settle.
posted by mrbigmuscles at 6:04 PM on November 11, 2014

To get an idea of proportion, it might cost about $3000 to have the lawyers read the demand letter and relevant patents, just to decide whether to respond. A round or two of negotiation and you've easily got $10k in legal fees, even if you settle. And that's for a simple case.
posted by RobotVoodooPower at 6:14 PM on November 11, 2014

Another wrinkle: RPX executives came from Intellectual Ventures, and together the two companies organized the Kodak portfolio licensing. Arms dealers don't have conflicts of interest.
posted by RobotVoodooPower at 6:23 PM on November 11, 2014 [3 favorites]

So yeah, if this comes from Intellectual Ventures people and if the insurance is crappy, it is extortion. I have more questions than opinions.

But your math about startup assets and finances is wrong, b1tr0t. A typical startup right now has between $1M–$5M in seed funding for the first 18 months. Maybe $10M if they're lucky. Even at that early stage they're getting threats from patent trolls, and $10k to make them go away sounds like a good deal. Even a company with $50M in financing would find a $10M defensive war chest a very difficult thing to lay hands on. And what a waste of money.
posted by Nelson at 7:40 PM on November 11, 2014

I don't get how this works. NPEs don't actually make anything, so how are they going to be threatened with a countersuit? They exist as shell companies that only own patents so they can't be countersued. Have to agree, if Intellectual Ventures is behind it, it's extortion.
posted by ryoshu at 9:26 AM on November 12, 2014

ryosho: "NPEs don't actually make anything, so how are they going to be threatened with a countersuit?"

A friend of mine has a consulting company that does patent litigation. Pretty much every idea that's been patented is covered by several nearly identical patents issued to different people, often held by NPEs. Presumably RPX has a large enough portfolio that they can go to the threatening NPE and say "hey, you pursue this, we point out all of the places that we have patents in this space, and then we go after your licensees for the same thing you're already extorting them for, or we go nuclear and invalidate all of them."

Patents are very much a shakedown business, and we're usually okay with getting the shakedown from one set of gangsters, but triggering the shakedown from two sets of gangsters means we'll usually fight back against the criminals IP lawyers who we were already paying for protection.
posted by straw at 10:56 AM on November 12, 2014 [1 favorite]

Oh, and just as a reminder, the tale of how IBM shook down Sun:

An awkward silence ensued. The blue suits did not even confer among themselves. They just sat there, stonelike. Finally, the chief suit responded. "OK," he said, "maybe you don't infringe these seven patents. But we have 10,000 U.S. patents. Do you really want us to go back to Armonk [IBM headquarters in New York] and find seven patents you do infringe? Or do you want to make this easy and just pay us $20 million?"

Given that RPX is tied to Intellectual Ventures, this is that same gambit, except that rather than being guys in suits showing up in your company's conference room you can pay your shakedown money online with a credit card.
posted by straw at 2:23 PM on November 12, 2014

I wish there were more information about RPX online. I've only found two in depth articles, both from less-than-reputable sources. RPX and the Broken Patent Market. RPX and the complicated business of stockpiling patents for good, not evil.

The main connection between RPX and Intellectual Ventures is that RPX was founded by John Amster in 2008 after he left Intellectual Ventures. In everything I've read about RPX they've been clear that they are purely a defensive patent firm, they won't start a patent fight with a company. (Presumably they may countersue as a defensive tactic.) Lord knows Intellectual Ventures plays a lot of shady games with shell companies, etc, but I see no evidence this is some long con and they're really the same company. RPX is a public company, too, which is both unusual and makes it much harder to pull shenanigans.

The other big connection that pops up is an Intellectual Ventures / RPX consortium buying Kodak's patents in 2012. I don't understand what that means. IV is a patent troll that's very likely to sue the very companies RPX is defending. It seems odd they'd cooperate to share these patent assets.

Really I don't understand any of this. What I do understand is both of these companies exploit the current insane US intellectual property law system, the ridiculous world of software patents. To the extent that whole enterprise is corrupt they all seem like bastards. But RPX might be useful bastards, and if I were running a tech startup today I'd see $10,000 as a very cheap price for some protection.
posted by Nelson at 4:40 PM on November 12, 2014

Came across a Law360 article this morning. It's behind a paywall so apologies for the wall of text.

Patent Troll Insurance Useful If Buyers Read Fine Print

Law360, New York (November 12, 2014, 8:06 PM ET) -- For startup companies worried that lawsuits by so-called patent trolls could cripple their business, insurance plans covering such litigation, like one recently launched by RPX Corp., can be a worthwhile investment, attorneys say, but companies must investigate to ensure policies provide the protection they need.

RPX is a defensive patent aggregator that uses membership fees to buy up patents that are being used or could be used by nonpracticing entities. In a separate business, it has offered insurance policies that cover the cost of infringement suits brought by such companies for a few years, but this week, it announced a new, lower-priced policy aimed specifically at startups and small businesses.

RPX premiums start at $7,500 for $1 million in coverage for litigation costs related to suits brought by nonpracticing entities. RPX co-founder and CEO John Amster said in an interview that one of the reasons the problem of nonpracticing entity litigation exists is the huge cost of defending cases that are inexpensive to bring.

"Having insurance changes the game," he said. "There is no longer that economic asymmetry."

Insurance against patent litigation costs can let emerging companies focus on building their business by turning the threat of a nonpracticing entity suit into a manageable business risk, he said. If more companies had insurance to cover litigation costs, it would be a "great deterrent," he said, since nonpracticing entities would know "they're not going to get a cheap and easy settlement."

RPX joins a small number of companies offering insurance covering the cost of nonpracticing entity litigation. Such insurance can be beneficial, but any potential purchaser must do due diligence to understand what it covers, according to attorneys who said they had examined patent litigation insurance but weren't familiar with the particulars of the RPX policy.

"This a potentially valuable product that startups ought to take a look at because of the high cost of patent litigation," said Richard Milone of Kelley Drye & Warren LLP. "A startup company could easily be wiped out by the cost of the case."

However, companies should look closely at the policy they are considering so they clearly understand what it covers, said Milone, chair of the firm's Washington, D.C., litigation group and co-chair of its insurance recovery group. Many of the insurance policies on the market covering patent litigation tend to be expensive or include catches that limit coverage, he noted.

That's because patent litigation is tough for insurers to underwrite, given the difficulty of determining how likely it is that a company will be sued for patent infringement and the expense and unpredictability of patent litigation, he said.

"It's really incumbent on the startup to negotiate beneficial language," said Ivan J. Snyder of Gilbert LLP, who handles insurance and intellectual property cases.

Litigation costs in patent litigation can escalate quickly into millions of dollars, so companies seeking insurance must negotiate a limit on coverage that they think will be sufficient, he said, although higher limits usually result in higher premiums.

In addition, patent litigation insurance policies often exclude coverage for acts prior to a retroactive date, Snyder said. Companies should therefore negotiate an earlier retroactive date so that the policy covers any alleged infringement that took place before the beginning of the policy.

"Making sure to negotiate with insurers so you're well-positioned is important," he said.

For startups in e-commerce and Web-based companies, where nonpracticing entities have been active, the particularly acute threat of a patent suit may be worth insuring against, said Joshua Lorentz of Dinsmore & Shohl LLP.

Looking into patent litigation insurance "definitely belongs on the checklist," said Lorentz, chairman of the firm's intellectual property department. Whether it is worth buying depends on what the insurer can offer and the company's specific needs, he said.

"It's something that startups should at least consider as part of getting going," he said. "The last thing you want is to get up to speed and have investment and a great product, and then find out it might fall within the claims of a valid patent."

Startups should consider patent litigation insurance if a nonpracticing entity suit would present a risk of a catastrophic loss that could threaten the company, Snyder said.

"Larger companies that have a big IP portfolio may have the resources to fight an NPE suit," he said. "Startups might not have the war chest to fight if a suit comes over the transom."

When investors are considering putting money into a startup company, they are increasingly concerned with avoiding tangential obstacles like nonpracticing entity suits, so insurance to protect against that risk could give companies an advantage, Lorentz said.

"This isn't foolproof, but it is able to provide some security," he said.
posted by naju at 9:37 AM on November 13, 2014 [1 favorite]