IP Exchanges: will they work?

Unitisation of IP?

I learnt several new words last Wednesday:  ‘monetizing’ IP which I think means selling IP; ‘commoditising’ IP which I think means turning IP into an asset you can sell; and, ‘unitising’ IP which I think means finding a way of quantifying IP such that you can define how a single use of the IP leads to a single end product.

[MSA note: another one is ‘valorisation’, which I thought was a French word, but is nowadays seen in English language materials, and means something like “value creation”.  Apparently the concept originates from Karl Marx; an example of use in an IP context appears here (but with plenty of scope for double entendres); the Hargreaves Report uses the term on page 87.]

I went to a talk given by Gerard Pannekoek, the CEO of IPXI, an IP exchange recently founded in Chicago, which demonstrated how IP can be traded as an asset.  On the basis that people have been exploiting IP for centuries, I expected to see the next set of the Emperor’s new clothes.  In fact, I think the model is different and new and will work well in some situations.

There is a great deal of detail about the IPXI model here and the ULR FAQs here are especially interesting.

My (dangerously brief) summary of the model and the thinking behind it is as follows:

These days, IP is seen as an asset rather than merely a collection of rights that can be used as a means of preventing other people from doing things.  Increasingly, IP is the carrot that makes deals happen.  The natural progression from this view is to find a market place in which IP can be traded like any other commodity.  IP shifts from being a right that brings a competitive advantage (ie freedom to operate) towards being a saleable asset that derives revenue.

The normal licensing model has shortcomings.  Identifying a potential licensee and then negotiating a successful deal is slow and resource intensive.  It is also an opaque system.  The rest of the market has no clear idea of the value of the IP nor of the quality of the IP nor of its take up in the market.

The IPXI exchange model addresses these problems.  IP is submitted to the exchange for review and assessment and, if approved is offered for sale.  Sales are made in terms of Unit License Rights.  A ULR is a standard form contract that is publicly available and grants the purchaser a non-exclusive right to use a pre-established unit of the IP.  So, for example, buy 50,000 ULRs and you can make 50,000 widgets that incorporate the patented technology. ULRs are tradable commodities in themselves and the exchange publishes price and sales details giving transparency and a market based valuation of the IP.  The exchange model promotes efficiency as it removes the need for time- consuming bilateral negotiations.  The exchange itself conducts a due diligence process before accepting any IP that is submitted and purchasers have no need to perform their own checks or to negotiate terms.  The model allows IP owners to outsource the marketing, auditing and enforcement activities.
The parallel is the open market element of a stock market.  Rather than trading in shares, the trade is in ULRs.

Pannekoek does not expect the exchange model to supplant in-house licensing functions. He freely admitted that the model works best for a certain sort of IP: it must be ‘unitisable’ IP; ideally, the offering needs a value of at least $25million; the IP needs a history of observable use and a significant number (meaning 20 plus) of potential licensees.  To give you a sense of the scales he has in mind, all the examples he gave in his talk related to the automotive industry.  My own feeling was that the model works best for patented products that are sold and used in bulk – what you might describe as ‘dumb’ technology.

Leaving aside the fact that I think that ‘monetizing’, ‘commoditising’ and ‘unitising’ are all ugly words, I do have reservations about this new model.  Although IPXI suggest that it is well suited to commercialising university technology, I am not sure how attractive it is for universities.  True, the financial and valuation side makes sense.  Avoiding the slow and expensive negotiations in bilateral licensing will be a bonus. But it seems to me that the ULR approach does not allow for exclusivity.  Many of those who take on university technology are looking for exclusivity to give them a market advantage.  Equally, many of them do not want transparency so that they have a chance to exploit that market advantage.  And university technology will often be too early stage to demonstrate the track record that the model seems to rely on as part of the internal validation process.

Even with these reservations, I think the model is here to stay.  Pannekoek set up the Chicago Climate Exchange which gave rise to the European Climate Exchange and carbon trading is now well established.  He reports that significant players in the US are joining IPXI and that these players include three universities (he didn’t say who) so the IPXI is one to watch.

I’d be curious to know if our readers share my reservations about the IPXI or whether our readers are more enlightened….?