Source: http://illinoisjltp.com/timelytech/page/16/
Timestamp: 2019-04-23 17:53:39+00:00

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Intellectual property is considered by some to be the largest asset class in the world. Intellectual property assets in the United States were recently estimated at $5.5 trillion. Despite this huge estimate of intellectual property assets, not all of these assets are being effectively utilized. In fact, in the United States alone, it is estimated that “a staggering $1 trillion” is wasted in underutilized patent assets. In order to help exploit some of these unused resources, a new exchange called the Intellectual Property Exchange International, Inc. (IPXI) has been created. The basis of IPXI is to allow IP owners to list their IP on an open market where licenses can be bought and sold freely.
Prior to the creation of IPXI, there were several ways one could take advantage of IP assets through licensing. The most traditional methods were bilateral licenses and compelling a license through court proceedings. These options have certain challenges or weaknesses that IPXI attempts to remedy.
Negotiating a license with a potential licensor is one of the most common ways IP licenses come about. Generally this requires a company to identify a particular potential licensor and negotiate a license with it. This can be difficult or troublesome for several reasons. First, corporations often discover potential licensors by identifying potential infringers of their IP. It is often not easy to negotiate a license with an entity that feels accused of appropriating IP. Second, there are numerous steps involved for an entity that seeks to enter into a bilateral license. When seeking a license, negotiating with every potential infringer takes significant time and effort. This increases transaction costs from a hypothetical market-based scenario where anyone could take licenses at a market-determined rate.
The next traditional way IP licenses occur is compelling a license through litigation. There are several issues with this method. Similar to the first method, the litigation route requires one to sue a single infringer at a time, greatly increasing the amount of effort to get an entire market to respect an IP asset. Next, litigation has significant risk. By suing a potential infringer, there is risk of not procuring a license. Worse still, one may have to take a compulsory license based on any counterclaims from the other party. Additionally, a court may find that a particular IP asset is invalid and the value of the asset may be lost completely.
Finally, the top reason to avoid seeking a license through litigation is the huge cost of litigation itself. In 1992 U.S. dollars, the mean cost including trial for a patent suit with $1 to $25 million at stake is $2.10 million. In addition to the cost of litigation expenses, the opportunity and business costs of participating in litigation can cost parties even more.
IPXI’s top goal is to create an open marketplace where buyers and sellers of patent licenses can easily come together to reduce transaction costs and other difficulties present in the current IP licensing market. It hopes to create an exchange where licenses can be bought and sold in an open market that will remove barriers to trade.
In order to facilitate a marketplace for patent licenses, IPXI has created a unit license right contract, or ULR contract. A ULR contract generally consists of a non-exclusive license for a single patent, or several grouped or pooled patents. In this manner, IPXI intends to list on its exchange patents or groups of patents that most easily facilitate the use of an entire technology or invention, not just of a single patent.
The ULR contract is also different from typical licensing and royalty arrangements. Traditionally, most royalty arrangements negotiated between two parties agree on a particular royalty rate that should be paid each time the technology is used. In this arrangement, the licensee pays the licensor the predetermined rate every time the technology is used. ULR contracts are designed differently. A ULR contract gives the purchaser the right to use the patent for a future one-time use of the technology.
For example, a telecommunications company may list on the exchange a patent for a particular cell phone technology. If another company would like to utilize the technology in a cell phone, it must purchase ULR contracts through the exchange. If the second company wants to make 200,000 cell phones using the technology, it must purchase 200,000 ULR contracts through the exchange. Each time the company builds one of the cell phones with the patented technology, one of its 200,000 ULR contracts is exhausted. In this arrangement, each ULR contract is preserved until actually used. As a result, if the company fails to exhaust all 200,000 ULR contracts it had purchased, it can in turn sell unused ULR contracts on the exchange. When you have multiple parties buying and selling ULR contracts, something resembling a marketplace for patent licenses can be conceived. IPXI’s hope is that this will create a robust resale market for ULR contracts.
The first step IPXI has contemplated before listing IP in its exchange is a vetting and valuation process. IPXI will first internally assess the quality and validity of the IP that is to be listed. This is an important step because IPXI is likely not interested in listing IP that will not have buyers or IP that could be easily invalidated. This process will include some evaluation of the potential market for the IP. It will also include a validity evaluation which can include prior art searches, review of the file history of a patent, and review of the patentability requirements in light of the particular patents at issue.
The next step, pending the IP makes it through the first round of evaluation, is approval by a selection committee. The idea of the selection committee is to have market or industry leaders sit on this committee and independently assess the viability of the offering. If the selection committee thinks the IP is worthwhile, the vetting moves on to the next step in the process.
This next phase utilizes external parties to check the IP for validity and value. This will include valuations and validity determinations. Also during this phase, the potential listing will be described and publicized for any members of the exchange to comment on. After a certain period of time to collect comments and perform the further validity and valuation checks, the selection committee will review all the assembled information for a final assessment.
Once the IP is approved for an offering, the IP owner must pay IPXI a fee to fund marketing for the IP and for other activities to make the IP ready for an offering as ULR contracts. Through this process, IPXI will come up with an “Offering Memorandum” that details what IP will be offered, how many ULR contracts will be offered in the initial offering, and at what price the ULR contracts will be listed.
Whatever rate the first offering of ULR contracts is sold at, IPXI plans to list the next offerings of ULR contracts at a relatively higher rate. This is to help stimulate demand during the first offering. Ideally, this higher price of subsequent offerings of ULR contracts will entice buyers to use the secondary market for procuring ULR contracts. Additionally, IPXI hopes this will stimulate organizations other than technology producers to buy ULR contracts. “IPXI contemplates that ULR contract futures and derivative products also will be developed.” IPXI hopes that this system brings about several advantages over the old methods for licensing.
The transparency and efficiency with which IPXI operates will offer corporate management the opportunity to make better business decisions regarding their IP. IPXI will offer license rights with standard terms at market-based prices. As a result, licenses are available to parties that normally wouldn’t have the ability to negotiate a license. This increases demand for the technology, benefitting the licensor while keeping prices low for the licensee.
IPXI also has the potential to greatly reduce transaction costs associated with previous methods of licensing, such as bilateral licenses. It also reduces prejudices that may exist within a market between two market players that would impact license terms. IPXI aims to offer identical terms to any potential licensee in a transparent way, which allows the market of licensees to be larger than it could be otherwise.
Finally, IPXI could help remedy some of the larger issues plaguing the United States patent system. These include patent trolls, the “patent thicket,” and rising costs of patent litigation.
The biggest challenge IPXI will face is finding buyers for the IP offerings. Patents are inherently unstable assets that can be invalidated in court. Further, parties often disagree about whether infringement actually exists or not. This could make implementing an exchange for patent licenses very difficult.
The next challenge for IPXI will be finding high quality IP that will sustain a marketplace. Patents expire and technology moves quickly, so taking advantage of IP rights often needs to be done quickly and efficiently. It is unlikely that companies will be willing to list IP on the exchange that is part of their core business. As a result, IPXI will be dealing with “leftover” IP to a certain extent. IPXI must be able to sift out the worthless IP and exploit the valuable IP they come across.
A final difficulty IPXI will face is how to structure its procedure for dealing with infringers of the patents listed on its exchange. One of IPXI’s goals is to reduce litigation and increase licensing. But if litigation must be used as a last resort, IPXI must determine how the litigation should proceed and how it will be funded. If parties are pooling patents these arrangements can get very complex, and IPXI would do well to develop a procedure for dealing with infringers.
IPXI is an exciting new entity that has the potential to significantly change the face of the IP marketplace. Despite significant hurdles, IPXI is poised to help create a better true market for patents and increase transparency and predictability in such a volatile sector of the law.
[*] J.D. Candidate, University of Illinois College of Law, 2013. B.S., Electrical Engineering, Olivet Nazarene University, 2008. I am incredibly grateful to Jeff Charbeneau and Dr. Robert Sanders for their invaluable assistance in helping me develop this topic. I would also like to thank the editing staff of the Journal of Law, Technology & Policy for all of their contributions to this article.
 David Silverman, Intellectual Property: The World’s Great Unknown Asset Class, Swiss Derivatives Rev., Autumn 2009, at 46, 46, available at http://www.sfoa.org/sfoa2010/include/Publications/doc/publi-pdf/SDR_41_Final.pdf.
 Kevin G. Rivette & David Kline, Discovering New Value in Intellectual Property, Harvard Bus. Rev., Jan.–Feb. 2000, at 7, available at http://www.pctcapital.com/pdfs/Harvard.pdf.
 The Exchange, Intellectual Prop. Exc. Int’l, http://www.ipxi.com/inside-ipxi/the-exchange.html (last visited Mar. 6, 2013).
 See Cameron Gray, A New Era in IP Licensing: The Unit License Right Program, Licensing J., Nov./Dec. 2008, at 1, available at http://www.oceantomo.com/system/files/New_Era_in_IP_Licensing_NovDec08_CGray_0.pdf (describing a new paradigm in IP licensing: the Unit License Right program, which is being developed by IPXI).
 Ian D. McClure & James E. Malackowski, The Next Big Thing in Monetizing IP: A Natural Progression to Exchange-Traded Units, Landslide, May/June 2011, at 3, available at http://www.ipprospective.com/wp-content/uploads/2011/05/mcclure-landslide_may_june20111.pdf.
 See Gray, supra note 4, at 5 (discussing how the ULR program can reduce transaction costs).
 James Bessen & Michael J. Meurer, Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk 132 (2008). The cost for a similar suit through discovery is $1.20 million. The mean cost including trial for a patent suit with more than $25 million at stake is $4.14 million. The cost for a similar suit through discovery is $2.59 million. Using a different metric, the mean legal costs for a patent owner in an infringement suit that goes to trial is $1.20 million, and $1.10 million if summary judgment is granted. Comparatively, the mean legal cost for an alleged infringer in an infringement suit that goes to trial is $2.85 million, and $0.66 million if summary judgment is granted. All numbers presented here are in 1992 U.S. dollars, so the current costs are likely much higher. Id.
 McClure & Malackowski, supra note 5, at 3.
 Sarah J. Duda & Benjamin Urban, The Patent Exchange: A New Approach to Licensing Intellectual Property, Snippets Volume 10, Issue 3, Page 11, available at http://www.mbhb.com/files/Publication/65686f54-b019-44ee-95ee-823981e6570f/Presentation/PublicationAttachment/145c9b5a-7903-4d5f-8244-89e9379e7b6c/Snippets%20Vol%2010%20Issue%203_081612-FINAL.pdf.
 Ian D. McClure, The Value of Efficiency and Transparency in IP Licensing: Let the Market Decide, Intell. Prop. Mag., Feb. 2011, at 53, 54, available at http://www.ipo.gov.uk/ipreview-c4e-sub-mcclure.pdf.
 Duda & Urban, supra note 10.
 McClure, supra note 13, at 54.
 See Intellectual Prop. Exch. Int’l, http://www.ipxi.com/inside-ipxi/faq.html (last visited Mar. 10, 2013) (discussing how “[t]ranche pricing creates early adoption incentives for ULR purchasers”).
 McClure & Malackowski, supra note 5, at 4.
 Duda & Urban, supra note 10, at 12.
Under the United States Patent Act, “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.” A finding of willful patent infringement allows the court, at its discretion, to “increase the damages up to three times the amount found or assessed.” While a finding of willfulness is a sufficient basis for awarding enhanced damages, it does not compel such an award. Additionally, the court may award reasonable attorney fees to the prevailing party for willful infringement.
Willful infringement significantly affects the technology that patents protect. In the recent high-profile Apple v. Samsung trial, the patents at issue concerned smartphones and tablets. The San Jose, California nine-person jury found that Samsung infringed six of seven Apple patents. The jury awarded Apple $1,049,393,540 in damages—one of the largest awards in an intellectual property case to date. Moreover, the jury found that Samsung willfully infringed on five of six Apple patents. Thus, presiding Judge Koh can grant Apple’s request to treble the $1.05 billion jury award and to award attorney fees under 35 U.S.C. §§ 284, 285.
The Court of Appeals for the Federal Circuit articulated a standard for evaluating willful infringement in Underwater Devices, Inc. v. Morrison-Knudsen Co. “Where . . . a potential infringer has actual notice of another’s patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing.” The affirmative duty of a potential infringer included, inter alia, the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity. Ensuing case law shaped the willfulness landscape and evaluates willfulness under the totality of the circumstances.
Twenty-four years later, the Federal Circuit overruled Underwater Devices and established a two-prong test for proving willful infringement in In re Seagate Technology, LCC. First, “a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.” This first prong is a threshold objective standard in which the state of mind of the accused infringer is not relevant. If the threshold objective prong is satisfied, the patentee must also demonstrate the second prong: “that this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer.” This second prong is a subjective inquiry. The Court left the development and application of Seagate’s willfulness standard to future cases. Subsequent case law established that the objective prong tends not to be met where an accused infringer relies on a reasonable defense to a charge of infringement. Examples of defenses that negate the objective prong of willfulness include invalidity and noninfringement assertions.
Seagate significantly altered two aspects of the willfulness landscape. First, it elevated the previously lower threshold for establishing willfulness. Seagate moved away from Underwater Device’s affirmative duty of care—which was akin to negligence—and adopted a more rigorous objective recklessness standard. The Federal Circuit reasoned that a higher standard of recklessness permitting enhanced damages comports with Supreme Court precedent requiring a showing of recklessness before civil punitive damages are allowed. Seagate’s heightened standard has made it more difficult for a prevailing party to recover enhanced damages.> Second, resulting from Seagate’s abandonment of an affirmative duty of care, potential infringers are no longer required to obtain opinion of counsel in order to avoid liability for willful infringement.
Under Seagate precedent, the willfulness two-pronged inquiry has long been treated as a question of fact. On June 14, 2012, the Federal Circuit once again transformed the landscape of willfulness by announcing, in Bard Peripheral Vascular, Inc. v. Gore & Associates, Inc., that the threshold prong is henceforth a question of law. The Bard Court held, “the objective determination of recklessness, even though predicated on underlying mixed questions of law and fact, is best decided by the judge as a question of law subject to de novo review.” In Bard, the Federal Circuit delineated a rule for two distinct circumstances. When a defense or noninfringement theory asserted by an accused infringer is purely legal, the objective recklessness of such a theory is a purely legal question to be determined by the judge. Such purely legal defenses include claim construction and reexamination. Alternatively, when the objective prong turns on fact questions or on legal questions dependent on the underlying facts, the judge remains the final arbiter of whether the defense was reasonable, even when the underlying fact question is sent to a jury. Such underlying factual defenses include anticipation or obviousness. Under the second circumstance, if the defense is a question of fact or a mixed question of law and fact, the court may allow the jury to determine the underlying facts relevant to the defense first, and then it would determine the reasonableness of the defense as a matter of law.
The Bard Court reasoned that the judge is in the best position to determine whether an accused infringer’s defenses are reasonable. Furthermore, judges have the discretion to award enhanced damages and attorneys fees for willful infringement; therefore, it is logical for judges also to decide the objective prong of willfulness. To support its holding, the Bard Court also relied upon the Supreme Court’s conclusion that objective baselessness should be a question of law through analogizing objective baselessness for sham litigation to a finding of lack of probable cause to institute an unsuccessful civil law suit—which subjects mixed questions of fact and law to a de novo review. Bard extended the Supreme Court’s analogy to encompass objective recklessness because Seagate’s objective recklessness and objective baselessness are identical under Federal Circuit precedent.
This most recent change to willfulness as a question of law substantially affects the overall willfulness landscape in two respects. First, a question of law is determined by the court, either on a pretrial motion for partial summary judgment or on a motion for judgment as a matter of law at the close of the evidence. Prior to Bard, few of these motions were granted because willfulness was ultimately a question of fact to be decided by the jury after trial. Now that willfulness is a question of law, an avenue is created for disposing of willfulness allegations by judicial decision prior to trial. Therefore, courts will likely experience increased filings of such motions due to this new avenue, and movants likely will experience greater success—not necessarily on the merits of the motion but on the sheer ability of courts to grant the motions without needing to submit the issue to the jury.
Secondly, the decision in Bard creates a disjointed pairing of a question of law with a standard for proving facts. Seagate requires that the threshold prong of objective recklessness be proven by clear and convincing evidence. Typically, clear and convincing evidence is the standard for proving questions of fact, which was consistent when willfulness was a question of fact. In holding that the threshold prong of objective recklessness is a question of law, the Bard court failed to address or change the standard of proof required for this prong. Thus, Seagate and Bard, understood together, create an issue of law that still must be proven by the standard for an issue of fact.
In an earlier concurring opinion, Justice Breyer addressed the exact problem we now face with Seagate and Bard. Justice Breyer, in his concurring opinion in Microsoft Corp. v. i4i Limited Partnership, firmly stated that the clear and convincing evidentiary standard should only apply to questions of fact and not to questions of law. Additionally, Justice Breyer instructed courts to prevent “the ‘clear and convincing’ standard from roaming outside its fact-related reservations . . . .” One does not have to make a significant inferential leap to conclude that Justice Breyer would admonish the Federal Circuit for establishing willfulness as a question of law that applies the clear and convincing evidence standard of proof. Although both remain “good” law, there is undeniable tension between Seagate and Bard that will likely be addressed in subsequent case law.
The willfulness landscape has undergone two significant changes within the last five years. First, the willfulness standard in Underwater Devices was replaced by the standard set forth in Seagate, which heightens the burden of proving willfulness by requiring objective recklessness as opposed to negligence. Additionally, Seagate abandoned Underwater Devices’ duty of care and duty to seek opinion of counsel. However, no change could be more significant than the change that occurred in Bard, which held that willfulness is as a question of law rather than a question of fact. As a question of law, judges may determine the threshold prong of willfulness without submitting the issue to the jury. The judge could dispose of a willfulness allegation by granting a motion for summary judgment or judgment as a matter of law. Thus, the authors posit that the courts will see an increase in such motions, and movants will experience greater success solely because of the new avenue to dispose of willfulness allegations. Another effect of the change in Bard is the tension created by joining a question of law with the burden of proving a question of fact—clear and convincing evidence. The authors posit that Justice Breyer would strongly disapprove of such joining based on his special concurrence in i4i, and the tension will be resolved in subsequent case law.
* J.D. Candidate, University of Illinois College of Law, expected 2013. B.A., Mathematics and Philosophy, University of Saint Thomas, 2010. Firstly, I would like to thank James Hanft at Schiff Hardin LLP for his insights and guidance during the 2012 summer associate program, which sparked my interest in this topic. Secondly, I am grateful to the editors of the Journal of Law, Technology, and Policy for their support while writing this piece. Lastly and most importantly, I would like to thank my family for their continued support throughout the years.
** J.D. Candidate, University of Illinois College of Law, expected 2013. B.S., Finance and Information Technology, Marquette University, 2010. Firstly, I would like to thank my co-author for introducing me to this topic and being a pleasure to work with. I would also like to thank my fellow Journal of Law, Technology, and Policy editors and members for their insights and advice throughout the writing and publication process. Lastly, I would like to thank my family for their encouragement of my legal education.
 35 U.S.C. § 271 (2010).
 35 U.S.C. § 284 (2011); e.g., In re Seagate Tech., LLC, 497 F.3d 1360, 1368 (Fed. Cir. 2007) (“Absent a statutory guide, we have held that an award of enhanced damages requires a showing of willful infringement.”).
 State Indus., Inc. v. Mor-Flo Indus., Inc., 948 F.2d 1573, 1576 (1991) (citing Modine Mfg. Co. v. Allen Grp., Inc., 917 F.2d 538, 542–43 (Fed. Cir. 1990)).
 35 U.S.C. § 285 (1952).
 Apple, Inc. v. Samsung Elecs. Co., No. 11-cv-01846-LHK at 2–7 (N.D. Cal. Aug. 24, 2012) (amended verdict form), available at http://cdn.slashgear.com/wp-content/uploads/2012/08/ApplevSamsung-1931.pdf; Jessica E. Vascellaro, Apple Wins Big in Patent Case, Wall St. J. (Aug. 25, 2012, 1:41 PM), http://online.wsj.com/article/SB10000872396390444358404577609810658082898.html.
 Apple, No. 11-cv-01846-LHK at 15.
 Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380, 1389–90 (Fed. Cir. 1983).
 > In re Seagate Tech., LLC, 497 F.3d 1360, 1368 (Fed. Cir. 2007).
 Spine Solutions, Inc. v. Medtronic Sofamor Danek USA, Inc., 620 F.3d 1305, 1319 (Fed. Cir. 2010).
 Advanced Fiber Techs. (AFT) Trust v. J & L Fiber Servs., Inc., 674 F.3d 1365, 1377 (Fed. Cir. 2012).
See Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 71 (2007) (noting that a reckless disregard of a requirement of the Fair Credit Reporting Act would qualify as a willful violation that makes a person civilly liable to the consumer).
 Siraj Husain, Note, The Willfulness Pendulum Swings Back: How Seagate Helps Level the Playing Field, 28 Loy. L.A. Ent. L. Rev. 239, 239–240 (2008).
 Cohesive Techs., Inc. v. Waters Corp., 543 F.3d 1351, 1374 (Fed. Cir. 2008); Stryker Corp. v. Intermedics Orthopedics, Inc., 96 F.3d 1409, 1413 (Fed. Cir. 1996).
 Bard Peripheral Vascular, Inc. v. Gore & Assocs., Inc., 682 F.3d 1003, 1007 (Fed. Cir. 2012).
 DePuy Spine, Inc. v. Medtronic Sofamor Danek, Inc., 567 F.3d 1314, 1324 (Fed. Cir. 2009) (quoting Warner Jenkinson Co., Inc. v. Hilton Davis Chem. Co., 520 U.S. 17, 39 n.8 (1997)).
 Microsoft Corp. v. i4i Ltd. P’ship, 131 S.Ct. 2238, 2253 (2011) (Breyer, J., concurring).

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