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The IPXI® - An Alternative to the License Agreement? Maybe!

Monetizing intellectual property (IP) as discussed in previous BONEZONE articles is the process of deriving tangible value from the IP or the technology that is protected by the IP. Currently, however, there are only a limited number of ways of deriving such value. For example, monetizing a patent usually follows one of two paths: 1) deriving value through the sale of products and services based on the coverage of the patent, or 2) leveraging the patent through licensing or outright sale of the patent. 

Critics have complained for years that IP licensing is an inefficient and costly way to do business. Most of these complaints center on the fact that the negotiations typically take any where from a few months to a year or more to complete. In addition, the associated transactional costs incurred by the parties may actually outweigh the value of the license. For example, think of the numerous steps companies undertake when they are contemplating a licensing agreement. First, they will determine the value of the IP and the market potential of the technology or product. After that is completed, they may identify possible licensees. Once a potential licensee is found, the due diligence process will occur with the validity and clearance position being evaluated. After these steps have been completed, the two parties finally commence the license agreement negotiations. Once the deal terms are agreed to and the contract is signed, the burden of policing of product sales and auditing of royalty payments starts for the licensor, while the licensee will take on the role of the enforcer as to the licensed IP rights. All of these steps will cost the licensor and the licensee time and money.

Over the past few years, a group of individuals, corporations and leading Universities have worked to create an alternative to the licensing paradigm with the formation of the Chicago based Intellectual Property Licensing Exchange International, Inc. (IPXI®). Led by several individuals who helped set-up and initially operate the Chicago Climate Exchange and European Climate Exchange (the exchanges are based on the cap and trade business model for greenhouse gas emissions), the IPXI will likely open for business later this fall. The new exchange is billing itself as the “world’s first financial exchange that facilitates non-exclusive licensing and trading of intellectual property rights with market-based pricing and standardized terms.” 

At the core of IPXI’s marketplace is a new type of commodity or exchange-traded product called the Unit License Right™ (ULR™) Contract. Each ULR Contract is offered on a non-discriminatory basis at a market-based price and sold on a standardized technology-unit basis or “unit-base” that is uniquely determined by IPXI according to the underlying technology or IP of the ULR Contract. The purchaser of a ULR Contract is granted the non-exclusive license to use the IP for a pre-determined number of instances based on the corresponding unit-base. In this way, each ULR Contract grants the buyer a right to manufacture and/or sell a certain predefined number of products or services incorporating or utilizing the patented technology without fear of an infringement suit. For example, a patent owner (i.e., licensor) lists on the IPXI a ULR Contract that covers a technology for a biological coating. Each ULR Contract will allow the purchaser (i.e., licensee) to make, use and/or sell one, or alternatively, a predefined number of implants with the patented biological coating, such as 100 implants. So, if the purchaser or licensee wants to make and sell 100,000 implants with the patented technology and each ULR Contract represents a single use of the IP, then the purchaser will need to buy 100,000 ULR Contracts. Each ULR Contract will expire when 1 implant is manufactured using the patented biological coating. A valuable byproduct of the exchange model is the secondary market for unused ULR Contracts. The IPXI will manage this hedge opportunity and attempt to minimize financial risk associated with unused ULR Contracts.

One of the biggest advantages of the ULR Contract for both IP licensees and licensors is the removal of the lawyer-intensive traditional bilateral licensing process that was discussed above. One of the IPXI’s initial objectives was to build an exchange that operates under two core principles that do not exist in the traditional bilateral product/technology licensing scenario: transparency and efficiency. Regarding transparency, the IPXI starts the ULR Contract process by performing in-house a legal analysis designed to give the marketplace confidence in the quality of all patent rights listed as available ULR Contracts. Following this vetting process, the IPXI publishes market-based pricing and the pre-established, agreed-to terms of all ULR Contract offerings in a manner similar to that of public equity offerings of corporations. This means that financial and technologic details are provided in offering memorandums, road shows as to the offered patents are undertaken and potential buyer one-on-one meetings are conducted.