Consider the example of Dr. James Cunningham, a veteran chemical and electrical engineer who began his career at Texas Instruments in 1961. Over the years, Cunningham accumulated 46 patents as an employee at six semiconductor companies and as a consultant to many more. Many of his inventions boosted the speed of computer microprocessors by working around limitations of the metals used to make circuit paths inside the microchips. In the 1990s, Cunningham came up with several ideas that made it easier for microprocessor companies to switch from aluminum circuitry to copper, which resulted in tremendous improvements in processor performance. Five of these copper-related ideas received patents.

Dr. Cunningham showed his patents to six major microchip companies and a semiconductor equipment company in the expectation that they would negotiate a fair license to use his inventions. In a perfect world Dr. Cunningham would be compensated for his time, talent, and investment; the manufacturers would get a technology to advance their business; and the public would get better computers. It should be a win-win-win situation. Unfortunately, that is not how the system works.

The licensing operations of big corporations are quite inscrutable to outsiders. Inventors often find it very difficult just to determine who in the company is the right person to speak to about a license. That was the case for Dr. Cunningham, even though he had worked in the field for decades.

From an inside perspective, corporate license negotiators are typically busy people, and some licensing staff tend to regard solitary inventors as crackpots or trolls until proven otherwise. Corporate employees are driven primarily by their perceived duty to limit the licensing fees they pay, not by a company’s obligation to pay for intellectual property of others that it uses. They accomplish this goal by deploying a number of tactics to whittle down an inventor’s patience and his price. Initial contact, for example, is usually followed by a seemingly interminable round of telephone tag. One corporate negotiator boasts that his first negotiating ploy is to avoid any meeting for at least two months—and then to reschedule it at the last minute.

That first meeting, when it finally occurs, is typically a prelude to anywhere from six to eighteen months of discussion and argument. Discussions about prior art can chew up months of meetings, as can debates about how the invention might find use in the marketplace. Manufacturers will often dispute the validity and enforceability of the patents. Even if they are already using the patented technology, they will rarely acknowledge that fact, thereby forcing the inventor to reverse-engineer the product in question (often at considerable expense) to answer some basic questions.

Large companies can also, of course, devote far greater resources to these discussions than any small inventor such as Dr. Cunningham can muster. Corporate lawyers can easily assemble market research that the inventor must dig deep to find, for example. And they have access to engineers who can help them understand the workings of the prior art and any infringing products (the better to obfuscate the infringement). The inventor, in contrast, must rely almost exclusively on his own research from the outside looking in.

After dragging out the process, the company often simply declines to license the patent under any reasonable terms. Five of the seven manufacturers that Dr. Cunningham approached turned him down.

When negotiations break down, an inventor is left frustrated and, at least until recently, with few options other than engaging a law firm to haul any infringer into court. The media frenzy surrounding a few high-payout patent suits, such as NTP’s $612.5 million settlement from Research in Motion in 2006, along with intense lobbying efforts by a few large companies, could give the impression that little guys often win at high stakes litigation. In fact, they hardly ever do. And the cost to an inventor for litigation can be very high.

Big players have a distinct advantage in a lawsuit because they can afford the multimillion-dollar legal fees and the lengthy delays, which typically run three to seven years for patent suits that reach a judgment on the merits. Even worse than the interminable delays, most inventors are loathe to sue because it distracts them from what they truly love—inventing! For these reasons, Dr. Cunningham elected not to turn to the courts for justice.

He should have been paid fairly, and fairly quickly, for his invention so that he could turn his attention to inventing the next great thing. That is what our system is supposed to encourage.  Yet under our current system, that rarely happens.

II. PORTFOLIO LICENSING OR OUTRIGHT PURCHASE

Although patent litigation gets all the ink, the market opportunity is actually much larger for patent licensing, which happens every day. There are a few proven models in technology patent licensing. Unfortunately for Dr. Cunningham and other small inventors of the world, there is no place for them in any of these models.

The first proven model is exemplified by the extensive licensing operations of giant companies with large, broad portfolios, such as IBM, Lucent, and Thomson. These corporations exploit their prodigious capital and market presence to execute licensing programs that extract hundreds of millions in revenue from hundreds to thousands of licensees. In a few cases, the licensing effort is actually the most profitable part of the company.

A second successful model has been demonstrated by companies that have narrow but deep portfolios, such as Qualcomm (cellular telephony), Rambus (memory chip designs), and Texas Instruments (semiconductor technology). Here, too, well-capitalized licensing programs tap hundreds of licensees for IP revenues in the millions of dollars.

The third well-established model is the corporate patent pool: a collection of patents drawn from a group of big companies, usually in support of a technology standard, such as MPEG video or DVDs. These pools are dominated by the founders’ patents and are backed with ample cash to enforce licensing. Members of the pool generally cross-license each other’s patents in deals that reflect the relative strength and impact of each company’s overall portfolio. Small-scale inventors are typically shut out of these pools. The result is effectively a kind of IP cartel that, holding hundreds or thousands of valuable patents, can turn market dynamics in its favor.

Academic studies have come to the same conclusion that experience in the real world shows: the access and negotiating strength of a large portfolio provides a powerful market advantage. Although somewhere between one third and one half of all issued patents originated with small inventors, few manufacturers can claim that they pay a third or more of their license fees to small entities. The vast majority of licensing revenues are collected by large firms.

Even a small inventor as prolific as Dr. Cunningham has far too few patents to set up a portfolio licensing operation using these conventional models. Nor does he have the credibility of established technology companies or the market clout of patent pools. Little wonder, then, that having been rebuffed in good-faith negotiation attempts, shut out of the portfolio game, and frustrated by often blatant poaching of their supposedly protected ideas, some patent holders see no choice but to swing for the fences in a high-stakes lawsuit. Those who follow this route are often derided as “patent trolls” and lumped in with less scrupulous patent holders that use serial lawsuits to extract nuisance-value settlements.

III. NEW BUSINESS MODELS

Emerging models of patent monetization will help the patent system to regain its balance. These new business models are being pioneered primarily by startups that are not product companies (at least not yet) and that share several other characteristics as well. They recognize the value of the intellectual property held by small inventors. They are keenly aware of the inefficiencies endemic in the traditional markets for licenses to such patents. And they have developed the ability to garner enough resources to work productively with corporations that either infringe small inventors’ intellectual property or want to draw on it as a source for innovation.

The past five years have seen a wide range of approaches to patent aggregation and distribution that promise to rectify many of the inefficiencies of the patent licensing market.

We are assembling portfolios of patents, some of which we purchase from small inventors and large companies. We couple the portfolios with careful analysis and research to create a rational licensing model for managing invention rights in markets where products rely on multiple technologies from multiple sources.

A firm such as ours can promote inventions in several ways. First, we present corporate license negotiators with a carefully pre-screened set of patents. Because the negotiators know that the patents are legitimate and relevant to their operations, the parties can come to terms much more quickly. Second, we have greater expertise in license negotiation and patent defense than do most inventors. Overall, we bring to the table a unique mixture of technical and business skills; most players in patent negotiations are more specialized and do not have this broad range of skills available. Finally, the work we do frees inventors from wasting their time at a task for which they are typically unenthusiastic and poorly suited.

Dr. Cunningham, for example, sold his suite of semiconductor patents in exchange for a lump sum payment in a transaction that took far less time than a typical licensing negotiation. Having received a fair return on his ideas, he can now get back to what he enjoys, while we enhance the value of his inventions by bundling them with others into a package that is much more attractive to microchip producers than his patents would be on their own.

This approach improves market efficiency not only for the inventor, but also for the manufacturer, in much the same way that real estate brokers do. If you want to build a skyscraper on a city block that is currently covered with multiunit flats, you could hold hundreds of negotiations to buy out the owners of the existing condos and apartments, or you could negotiate one lease with a veteran real estate developer who will deal, in turn, with those owners. The latter is far more efficient.

The new business model described above plays a role in matching patent owners with patent users, allowing inventors and their business partners to be fairly compensated for their invention, providing companies with an efficient means to license or purchase inventions they are using at a fair price, and improving the speed and breadth of the public’s access to new products and services—all while ensuring that bad patents do not receive unreasonable compensation or otherwise gum up the works.