LES Standards Focus Group

Pilot #1 Standards of Business: Conduct in IP Transactions

July 29, 2014

David Ruder, VP Corporate Development, RPX Corporation

Committee #1: Conduct in IP Transactions

Rationale

•RPX and others share the belief that while the patent market is becoming more robust, it remains inefficient

•The patent market is plagued by transaction costs and a lack of transparency

•A major driver of inefficiency comes from the different business practices employed by various market participants and an unwillingness to share data

•If standards of conduct can be established, the IP market will be more efficient and IP owners can capture more value

2

Objectives and Focus

Committee will focus on increasing efficiency of IP markets

1.Support and propose standards for licensing and certification of market participants

2.Create standards around data and disclosure to promote transparency

3.Support establishment of “clearinghouse” of IP transaction data

3

Scope of the Committee’s Work

• Create thought leadership around what can be done to promote market efficiency– Licensing and certification– Behavioral standards– Disclosure standards

• Establish minimum standards of data disclosures

• Establish blueprint for creation of transaction clearinghouse

4

Prioritization/Sequencing of the Work

1. Generalized acceptance of how we think about IP marketplace

2. What data do we need to collect and disclose

3. How do we create the IP transaction clearinghouse?

5

Kinds of Companies Who Should Plan to Participate

• Any company that engages in IP transactions and wants to drive market efficiency

– Sales and purchases of IP– Licensing in and out– Corporations, intermediaries (brokers), financing sources,

insurance firms

• Not for you if you support litigation as primary transaction driver

6

Overview of RPX’s Interest in Standards

• Very active market participant

– Over $800 million spent buying patents– Over 170 clients– Completed over 170 patent transactions– Largest buyer on the open market in 2013, accounting for 12%

of all portfolios purchased

• RPX would like to see the patent market adopt standards that allow the market to be more efficient with lower transaction costs

• Adopt practices that have allowed other markets to become more efficient

– Pricing data and transparency– Fee disclosure– Licensing / certification

Many Markets are Efficient

Structure of a Standard Securities Exchange

The Patent Market Still Has Ways to Go

NPE Cost Study Data: Legal Costs Generally Exceed Settlements

RPX Cost Study Data

Total cost

to resolve

Legal cost

Settlement

Transaction Success Associated with Professional Brokers

Experienced brokers shopping patents more likely to transact

Note: According to RPX Research

Number of total offered portfolios

Tra

nsacti

on

su

ccess r

ate

The Marketplace for Intellectual Property

• Marketplace is involves $billions in transactions– Patent licensing – Trademark licensing

• Many asset types– Patents– Trademarks– Copyrights– Technology & Know-how

• Many transaction types– Asset sales and purchases– IP transactions to support other transactions (M&A, joint ventures, etc.)– Licensing transactions– Financings

Diversity of Participants in IP Transactions

• Asset owners– Operating companies– Licensors– Universities and research organizations– Patent pools

• Intermediaries representing owners– Brokers– Licensing agents– Attorneys– Bankruptcy trusees

• Transaction support– Valuation firms– Technology/engineering consultants– Specialized law firms– Business consultants

With Complex Transactions and Diverse Participants Inefficiencies can Arise

• Common concerns– “Dishonesty”

• Valuation expectations• Bid expectations

– Lack of complete preparation– Lack of expertise– Differing business practices– Appropriate presentation of information– Appropriate use of information

• Disclosure• Confidentiality

– Reporting and calculation of royalties– Differing perceptions of risk (contractual indemnities)

Transaction Rates Low

Source: RPX Corporation 15

Transaction Success Dictated by Experience

Brokers with more deals ~2x more successful than those with less experience

Note: According to RPX Research

Number of total offered portfolios

Tra

nsacti

on

su

ccess r

ate

Inefficiencies in the IP Market have Created Cost

• Increased pre-transaction litigation• Asset owners often too aggressive• Potential licensors often too resistant• Attorneys sometimes have agency conflict

• Post-transaction litigation• Disputes over whether obligations are being met (such as royalties)• Disputes about whether reps & warranties were true in the first place• Malpractice allegations / disputes

• Transactions that are not completed• Inability to engage in meaningful price discovery• Inability to understand ownership issues

• Chain of title• Shareholder approval• Existing licenses / encumbrances• Pre-existing contractual obligations

How do We Think About Costs?

• Financial costs– Attorneys fees– Distraction / wasting internal resources– Failed business opportunities

• Reputational costs– Marketplace distrust– Combative / apprehensive / reluctant market participants

• Regulatory costs– Increased scrutiny– Increased regulation– Additional bureaucratic and compliance burdens

NPE Cost Study Data: Legal Costs Generally Exceed Settlements

19

With Inefficiencies of 2008-9, US Regulators Attempting to “Standardize” SWAP contracts via Dodd-Frank

Current ISDA Standard Agreement

•17 Pages long•14 Paragraphs•42 Defined Terms

Discussion highlight: Communication of Data and Price Discovery

• How do we promote better sharing of data?

– Pricing and price discovery– Fee disclosure– Past licenses and licensing history

• What data do we share for any transaction?

21

Discussion Highlight: Pre-Transaction Preparation

• How do we encourage parties to do the necessary work to compress negotiation and transaction execution?

– Understanding of encumbrances– Understanding of other agreements implicating the IP

• Change of control provisions• Joint rights to IP

– Board approval

22

Discussion highlight: Creation of Transaction Clearinghouse

• What information is provided?

• How do we host and manage?

• Costs to build?

• Pricing– Contributions of data– Access to data

• Fee included for any transaction

23

Next Steps

• Discussion

• If interested in committee please contact David Ruder or other LES committee members

24