Tech World Worries as Company's Patent Stockpile Grows Intellectual Ventures happily invests in invention, while competitors tremble in fear

Lisa Lerer IP Law & Business 06-14-2006

Last January a dozen of the world's most respected scientists gathered in a nondescript conference room at an office building outside of Seattle. They sat around a table cluttered with laptops and papers, snacked on bowls of beef jerky and Chex Mix, and plotted the next technological revolution.

The brainstorming session, practically unintelligible to those with a less-than-Mensa- level IQ, took place at the offices of Intellectual Ventures, a start-up founded in 2000 by former Microsoft Corp. chief technologist Nathan Myhrvold. No intellectual slouch himself, Myhrvold not only led the discussion, but was an eager contributor, sketching out flow charts on a large whiteboard at the front of the room. A handful of patent prosecutors, charged with translating "aha moments" into patent applications, desperately tried to follow along, noting every reference, pulling up obscure theorems on their computers and snapping photos of Myhrvold's scribblings. Finally, after two days of discussion -- over the merits of using new technologies in medical treatments -- the group had a breakthrough. Jumping out of his seat, Myhrvold exclaimed, "This is Star Trek-level medicine!"

This is the friendly face of Intellectual Ventures. At the Bellevue, Wash.-based company, the science hails from Star Trek but the business plays out like Star Wars. For the past six years, Myhrvold and his Jedi inventors have been brainstorming, developing and patenting their best ideas. The company doesn't plan on manufacturing, or commercializing, a product. "We are a pure play about invention," says Myhrvold with prototypical passion. "Really big ideas have to come from somewhere."

But at Intellectual Ventures, not all the big ideas come from the Jedis. Another arm of the 100-employee company, headed up by former Intel Corp. in-house counsel Peter Detkin -- a Darth Vader figure to many -- has been buying up thousands of patents through shell corporations. A $400 million investment from some of the biggest technology companies, including Nokia Corp., Intel, Apple Computer Inc., Sony Corp. and Microsoft, funds the shopping spree. (None of these companies would comment for this story.) Some in the IP asset management field estimate that Intellectual Ventures has amassed 3,000 to 5,000 patents.

As the patent stockpile grows, so does the speculation -- and the fear. IP lawyers and tech executives worry that Intellectual Ventures is less interested in changing the world

1 From http://www.law.com/jsp/newswire_article.jsp?id=1150189517581 14 October 2006 with big ideas, and more focused on becoming an über-troll, wreaking litigation havoc across industries with its patents. So far the tight-lipped company hasn't revealed much about its plan. "We don't proactively tell our story." says Myhrvold, "There's little in telling our story that benefits us." But this winter Myhrvold seemed to change his mind, inviting IP Law & Business up to Bellevue. Intellectual Ventures promised candor, but delivered something a bit more translucent. While company management filled in some blanks in the Intellectual Ventures story, they refused to discuss financials or reveal details about licensing deals, citing confidentiality agreements. Still, these details may not have been enough to end the speculation. After only a few years in business, Intellectual Ventures may simply be too young to know whether it will turn to the dark side.

For now, Myhrvold's happy to strike back at critics who are crying troll. "They can't quite bring themselves to believe we are doing what we are doing," says Myhrvold. "[Critics think], 'They can't be screwing around with a bunch of ideas for that long,'" he adds with a quick laugh. But that, he says, is exactly what Intellectual Ventures is doing. The company focuses on creating new technologies. The rest -- product development, commercialization, manufacturing -- will be handled by joint ventures, licensing and spin- off companies.

Intellectual Ventures represents a natural economic evolution, says Myhrvold. As the United States changes from a manufacturing to an ideas-based economy, making patents more valuable to businesses, a company based solely around IP seems almost inevitable. But coming up with marketable ideas might take ten years, he says. Intellectual Ventures plans on keeping the creditors at bay by becoming the Wal-Mart of the licensing world -- a one-stop patent shop. To do that, the company needs a whole lot of intellectual property, says Myhrvold: "IP is a game where scale really matters. One patent could be worth nothing or $1 million. It's hard to plan on the economic value of a single patent." While Myhrvold acknowledges that Intellectual Ventures has "a lot of patents," he shies away from an exact number.

Few besides Myhrvold could lead a company with such a grand focus. The 47-year-old millionaire has had an intellectual life that would delight Da Vinci. He holds a Ph.D. in theoretical and mathematical physics, M.S. degrees in mathematical economics, geophysics and space physics. As a postdoctoral fellow at Cambridge University, Myhrvold researched quantum physics with Stephen Hawking. He's also a published nature photographer and has had his state-of-the-art kitchen -- and his recipes -- featured in The New York Times Magazine. Intellectual Ventures' offices reflect his fanatical inquisitiveness: Antique microscopes and typewriters line the halls, and a model of a full-scale Tyrannosaurus Rex head greets visitors in the lobby.

But even Da Vinci needed help. Along with co-founder and former Microsoftie Edward Jung, Myhrvold's recruited an all-star staff, including Detkin and Greg Gorder, previously a partner at Perkins Coie, who has more than 100 venture capital financings under his belt. According to a former Intellectual Ventures executive, who agreed to speak anonymously, these four managers get a little under 2 percent of the money they've raised -- including the $400 million brought in from the company's investors.

Right now, Intellectual Ventures only has one homegrown patent. In November, the Patent and Trademark Office granted Myhrvold's company a patent for an image sensor that allows greater depth of field in photographs -- not exactly a big idea, but as the

2 From http://www.law.com/jsp/newswire_article.jsp?id=1150189517581 14 October 2006 company is patenting a mix of ideas from "bold and risky," says Myhrvold, "to less ambitious, incremental ones." More are coming: Intellectual Ventures has filed about 400 applications at the PTO, as well as several dozen international applications, says chief patent counsel Casey Tegreene.

Many of the patent applications come out of the company's invention sessions. Intellectual Ventures has held about 60 over the past three years. The majority of participating scientists work for the company as outside consultants, including Leroy Hood, inventor of the DNA sequencer; W. Daniel Hillis, chair of R&D consulting firm Applied Minds, Inc.; and Massachusetts Institute of Technology professor Robert Langer.

After each session, a team of in-house patent lawyers comb through all the notes, papers, digital tapes and photos from the session looking for promising ideas. The review is detailed and confidential: Lawyers and patent agents spend two to eight hours per hour of tape. To prevent the recordings from being used as evidence in future trials, they're automatically erased after six months. Intellectual Ventures then examines the market potential of the flagged ideas. One session can lead to as many as 80 applications. And only about 10 percent of the patent prosecution work gets outsourced - - mostly to solo and small practitioners like Washington, D.C.-based Sterne, Kessler, Goldstein & Fox. With 15 in-house patent lawyers, Tegreene says that Intellectual Ventures is one of the biggest patent prosecution firms in the Northwest.

To figure out how to turn patents into profits, Myhrvold hired vice president Brent Frei, founder of Onyx Software Corp. and a former Microsoft programmer analyst. So far, Frei hasn't come up with much that he's willing to discuss. He speaks in generalizations, writing business school-type theories on his office whiteboard. The plan, he says, is to "invent across the spectrum." The hulking 6-foot-7-inch former Dartmouth football player draws a large graph, explaining Intellectual Ventures's business philosophy. At the bottom are emerging markets, like bioinformatics, and at the top, mass markets, areas like wi-fi, software, and cell phones. Presumably, Intellectual Ventures wants to be in all these spaces. "We're trying to get as much technology as possible and then figure out the best way to commercialize," says Frei. "We're not seeking $1 million to hold someone hostage," he says, instinctively answering the troll criticisms. With so much energy devoted to creation, Frei estimates that the first actual Intellectual Ventures- created business won't launch for at least six months to a year. "It's a long-term play," says Myhrvold. "Having patient investors is a key aspect."

Inventors won't have to be too patient. While the creative juices flow, the patent stockpile will pay the bills. "Today it's all about numbers and bulk," says Frei. Intellectual Ventures seeks out key patents in converging areas, like software, semiconductors, wireless, consumer electronics, networking, lasers, biotechnology and medical devices. For example, says Frei, a company working in online banking also needs security and e- commerce technology. Theoretically, Intellectual Ventures would offer them freedom to operate with a licensing package covering those key areas.

Ideally, says Frei, Intellectual Ventures will collect a huge patent library and, for a fee, license a variety of different technologies. Most licenses will be nonexclusive, an offer made particularly to the investors. Some industries, like biotech, will require more

3 From http://www.law.com/jsp/newswire_article.jsp?id=1150189517581 14 October 2006 expensive, exclusive licenses. "We reserve the right to be smart," says Myhrvold, describing how Intellectual Ventures will tailor licenses to individual industries.

Of course, a patent licensing strategy only works when backed by the threat of litigation. And the company's critics are only too happy to speculate about that threat. Some have theorized that Intellectual Ventures is just a front for its investors -- a shield designed to protect them from patent suits. The tech giants can use Intellectual Ventures to buy small patent portfolios cheaply and pull them off the market, avoiding future litigation. Intellectual Ventures denies that its investors steer its acquisition strategy. "We are not controlled by anyone," says Frei. "We are amassing things that are valuable and going to get a market rate for them."

The former Intellectual Ventures executive claims that his former employer plans to hold entire industries hostage with high licensing fees, and the management team will be rewarded with a cut of the licensing revenue. Any company that refuses to take a license, or invest in Myhrvold's vision, says the executive, will face a lawsuit funded by some seriously deep pockets. Others paint a less nefarious picture, but fear that if Myhrvold's innovation model fails, the company, desperate for cash, will turn into a licensing monster -- and no one but those investors will be safe: "If the business model starts to fail, then they're sitting there with a huge portfolio and a relatively straightforward way of getting return by sending letters to a lot of people who aren't investors," says Dewey Ballantine patent litigation partner Anthony Shaw.

"These are the trolls that call other people trolls," says Raymond Niro, name partner at Niro, Scavone, Haller & Niro, who is known for representing clients considered by many to be trolls.

Calling Peter Detkin a troll is like challenging a Grand Master to a quick game of chess. Detkin coined the term in 1999, after Intel was sued for infringing the patents of TechSearch, a small patent-holding company (now a subsidy of Acacia Technologies Group). When Detkin referred to TechSearch as a "patent extortionist," the company sued for libel. So the Intel team swapped in "troll," and an industry swear word was born. In 2001 Detkin told our sibling publication The Recorder "A patent troll is somebody who tries to make a lot of money off a patent that they are not practicing and have no intention of practicing and in most cases never practiced." Intellectual Ventures easily fits the bill.

Over dinner, at a trendy Silicon Valley restaurant a couple of blocks from his home, Detkin makes it clear that he doesn't like the tables being turned. "There's just no clear definition at this point," he says, pausing for a tortilla chip. "A troll has become just a word for 'A plaintiff I don't like.'" Detkin's updated definition: someone who takes a single patent or small portfolio of questionable value and asserts it purely for "nuisance value." That's not Intellectual Ventures, which seeks out quality patents, offering good inventors another avenue to monetize their work, he says. Intellectual Ventures, caring only about patents, has more alternatives to offer inventors than corporations. The company will incorporate royalty sharing, additional payment terms and clauses that allow inventors to continue to invent into deals.

While not much is known about Detkin's patent shopping, the former Intellectual Ventures executive gives some details. Intellectual Ventures, says the executive, forms

4 From http://www.law.com/jsp/newswire_article.jsp?id=1150189517581 14 October 2006 a new shell corporation each time it acquires a new patent portfolio. A special computer program names the companies, making them difficult to hunt down. The former executive pointed us to past monikers, including Thalveg Data Flow, Orange Computer and Maquis Techtrix -- all were traceable only to Seattle-area post office boxes.

Using fake companies to conduct real business isn't new to Detkin. "This is a Detkin trademark," says Niro, who represented TechSearch in the Intel litigation. During that case, Detkin created a shell corporation, Maelen Ltd., which offered TechSearch $325,000 for its patent, a price far lower than the millions at stake in the trial. The ploy failed when a judge realized that Maelen was really operating in Intel's interest.

Detkin, who joined Intellectual Ventures in 2002 after spending a week helicopter skiing in backcountry Canada, says that using shell corporations is just good business practice. "When you acquire assets you want to hold them separately," he says. "There's nothing nefarious about it." Companies often buy all kinds of assets under shell corporations to limit potential liability, he says.

Two years ago, Detkin set up a shell corporation called Brissac Electronic Holdings, and, under that name, bid on a portfolio of e-commerce-related patents at an auction in a California bankruptcy court. But Detkin dropped out after bidding crossed the $14.9 million line, and the portfolio went to Novell Inc. "To date, I've found Intellectual Ventures to be professional and not overly aggressive," says James Malackowski, head of IP merchant bank Ocean Tomo, which ran the patent auction. But if Intellectual Ventures starts firing off lawsuits, says Malackowski, it will face a backlash and possibly even legislative regulation.

If that happens, Intellectual Ventures is ready: The company has already set up a lobbying presence in Washington, D.C., and is playing an active role in the legislative debate over patent reform. Myhrvold testified on the issue to the House subcommittee on the courts, the Internet and intellectual property in April 2005, and last year Detkin submitted a written report on reform to the Antitrust Modernization Committee of the Federal Trade Commission. Both have spoken at industry group meetings and universities across the country. Intellectual Ventures, naturally, argues that patents protect ideas, not just products. Patent holders of all stripes should be able to get a court-ordered injunction, stopping the business operations of an infringing company.

For now, patent injunctions are a theoretical matter for Intellectual Ventures, although the company isn't ruling out future patent lawsuits. "In some cases we'll have to sue," says Frei. But a suit is less lucrative, Frei maintains, than a small running royalty on a key patent paid by a lot of companies for 10 to 15 years.

Besides, Myhrvold's curiosity (and funds) seem to have limits. "If I sue everyone, I spend all the money on lawyers," says the invention king, exasperated. "I still spend all my money on lawyers because of filing those damn things."

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PATENTS UNDER COVER Intellectual Ventures uses shell corporations on an enormous scale, opening a new one for each patent purchase, says a former company executive. Here's a sampling. SHELL COMPANY SELLER TECHNOLOGY PURCHASED Thalveg Data Flow Minnesota-based start- E-commerce up Net Perceptions recommendation software. (Intellectual Ventures paid $1.8 million.) Purple Mountain Server Colorado-based inventor Method to increase Kenneth Mobley speed of SDRAM memory chips Maquis Techtrix Timothy Knight Tabulating system for online communities Ben Franklin Patent Danny Lange, Barbara Communication between Holding Nelson, Jing Su and network system and James White agent server Source: The Patent and Trademark Office

6 From http://www.law.com/jsp/newswire_article.jsp?id=1150189517581 14 October 2006