The Great Failure of the IPXI Experiment: Why Commoditization of Intellectual Property Failed

Cornell Law Review Volume 102 Issue 4 May 2017 Article 5 The Great Failure of the IPXI Experiment: Why Commoditization of Intellectual Property Failed Merritt L. Steele Follow this and additional works at: http://scholarship.law.cornell.edu/clr Part of the Law Commons Recommended Citation Merritt L. Steele, The Great Failure of the IPXI Experiment: Why Commoditization of Intellectual Property Failed, 102 Cornell L. Rev. 1115 (2017) Available at: http://scholarship.law.cornell.edu/clr/vol102/iss4/5 This Note is brought to you for free and open access by the Journals at Scholarship@Cornell Law: A Digital Repository. It has been accepted for inclusion in Cornell Law Review by an authorized editor of Scholarship@Cornell Law: A Digital Repository. For more information, please contact . \\jciprod01\productn\C\CRN\102-4\CRN405.txt unknown Seq: 1 12-MAY-17 9:26 NOTE THE GREAT FAILURE OF THE IPXI EXPERIMENT: WHY COMMODITIZATION OF INTELLECTUAL PROPERTY FAILED Merritt L. Steele† INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1115 I. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1117 A. The Problem: The Patent Licensing Dilemma . 1117 B. The Hypothesis: The IPXI Model . . . . . . . . . . . . . 1121 C. Procompetitive Efficiencies of the IPXI Model . 1125 1. De Minimis Transactional Costs . . . . . . . . . . . 1125 2. Price Transparency . . . . . . . . . . . . . . . . . . . . . . . 1127 3. Pooled ULRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1128 II. THE GREAT IPXI EXPERIMENT . . . . . . . . . . . . . . . . . . . . . . 1129 A. Before Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . 1130 B. Post-Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1131 III. ERRORS IN THE EXPERIMENT: WHY IPXI FAILED . . . . . . 1133 A. Commodities Market . . . . . . . . . . . . . . . . . . . . . . . . 1135 B. Securities Market . . . . . . . . . . . . . . . . . . . . . . . . . . . 1137 C. Lessons from IPXI . . . . . . . . . . . . . . . . . . . . . . . . . . . 1140 CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1142 INTRODUCTION I have not failed. I’ve just found 10,000 ways that won’t work. – Thomas Edison The modern U.S. patent system is plagued with high transaction costs, secrecy, and legal risks. Due to these pitfalls, many innovators simply do not have the resources to participate in the intellectual property market. In 2008, the Intellectual Property Exchange International, Inc. (IPXI) was organized to develop a new model for licensing intellectual property based † Cornell University, B.A. with Honors, Government & American Studies, 2014; Cornell Law School, J.D. candidate, 2017; Online Editor, Cornell Law Review, Volume 102. I would like to thank Professor Oskar Liivak for his invaluable guidance. I also thank Sue Pado and the members of the Cornell Law Review for their hard work. Finally, I want to express my deepest gratitude to my law school family for their patience, support, and advice throughout the writing process. 1115 R R R R R R R R R R R R R R R R \\jciprod01\productn\C\CRN\102-4\CRN405.txt 1116 unknown Seq: 2 CORNELL LAW REVIEW 12-MAY-17 9:26 [Vol. 102:1115 on “transparency, price discovery, efficiency, and liquidity.”1 IPXI sought to replace costly bilateral licensing negotiations with a more accessible “market-based trading platform”2 for patent licensing rights. IPXI sought to standardize and commoditize patent licenses in order to facilitate trading on these licensing rights on an open market.3 The model created a standard, non-exclusive contract called a Unit License Right (ULR), which could be traded on the exchange.4 This new innovative model garnered support from leading companies such as Ford, JP Morgan Chase, Sony, and even notable research institutions.5 Despite this promising beginning, the IPXI experiment ended only two years after its first offering.6 This Note seeks to determine why this market-based model failed and what it means for the U.S. patent system. IPXI executives have publicly attributed the failure of the world’s first electronic financial exchange for patent licensing rights to the refusal of licensees to engage in negotiations until they face legal action by licensors. In a public statement about its closing, IPXI lamented, “IPXI’s business model offered fairness and transparency and relied upon patented technology users to be good corporate citizens. In the end, potential licensees made it clear that the only way IPXI would really get their attention was through litigation, and that’s exactly what our business model tried to overcome.”7 This Note evaluates whether the great failure of the IPXI business model truly stems from licensors refusing to engage in good-faith licensing agreements as claimed. Professor Jorge Contreras has previ- 1 Letter from Garrard R. Beeney, on behalf of IPXI Holdings, LLC & Intellectual Property Exchange International, Inc., to Renata B. Hesse, Deputy Ass’t Att’y Gen., Antitrust Division, Dep’t of Justice (Nov. 30, 2012) (on file with the Dep’t of Justice). 2 Id. 3 See id. at 2–3. 4 Id. 5 Id. 6 See Ian D. McClure, From a Patent Market for Lemons to a Marketplace for Patents: Benchmarking IP in Its Evolution to Asset Class Status, 18 CHAP. L. REV. 759, 795–96 (2015). 7 Joff Wild, IPXI Demise Caused by a US Patent System That Offers No Incentive for Good-Faith Licensing, Says Exchange’s CEO, IAM (Apr. 7, 2015), http:// www.iam-media.com/blog/detail.aspx?g=93e8d407-b24c-4d9a-a59c-da9fe9e3f 578 [https://perma.cc/QJ67-LZU8]; see also David L. Newman, The Unfortunate Fall Of The IPXI Marketplace, LAW360 (Dec. 8, 2015, 10:24 AM), http:// www.law360.com/articles/734578/the-unfortunate-fall-of-the-ipxi-marketplace [https://perma.cc/CD2M-XEBX] (discussing IPXI’s attempt at transparency to instill fairness giving way to a “litigation-driven, patent licensing system”). \\jciprod01\productn\C\CRN\102-4\CRN405.txt unknown Seq: 3 12-MAY-17 9:26 2017] THE GREAT FAILURE OF THE IPXI EXPERIMENT 1117 ously grappled with this question from a FRAND8 perspective.9 However, this Note employs an economic analysis of ex ante and ex post licensing to examine this question. Part I outlines problems with traditional patent licensing and then describes how the IPXI business model proposed to fix these problems. Next, Part II proceeds to deconstruct the IPXI business model to highlight why the commoditization of patents is problematic. Part III offers direction for potential future initiatives to encourage good-faith licensing negotiations. Finally, this Note concludes by discussing what the failure of IPXI means for the U.S. patent system. I BACKGROUND A. The Problem: The Patent Licensing Dilemma The course to innovation is by no means simple. The path is paved with expense, risk, and uncertainty.10 However, Congress has attempted to create a (...truncated)