P R O F I L E S I N I P L A W

Cory Van Arsdale Senior Vice President, Global Licensing,

Intellectual Ventures Management, LLC (IV®) By Susan P. Pan

What was the major factor that led you to leave your consulting practice and join Intellectual Ventures (IV)?

I spent 14 and a half years at Micro­soft, so you could probably call my consulting practice after Microsoft and before IV a bit of "I needed to do some­thing different for a while." I consulted on a lot of different things, some of which involved intellectual property. But my specialty, my experience, was in closing transactions. I reached out to IV because I like being in dynamic, high-IQ environments with a lot of peo­ple that I interact with every day. When I decided to get back to "regular" work, I thought about my career over almost 30 years and what was important to me. The number one thing on the list was who I had worked with. I wrote down the names of people for whom, had they called me to come do some­thing, I would have probably jumped at the chance. One of those names on the short list was Nathan Myhrvold. I had worked with Nathan at Microsoft, and last worked with him in 1999 before he went on sabbatical and eventually left Microsoft. He was just one of the people that I really enjoyed working with—his intellect and how he chal­lenged me. So I reached out to him not knowing a lot about Intellectual Ventures at the time.

It happened to be that IV was a nice intersection of my career skillset. For my first 15 years of working after law school, I was a transaction attorney at a law firm, then at Sun Microsys­tems, Apple, the startup Be, and then Microsoft, all working in-house. At Microsoft, I left the law department in 2000 and went over on the business side and started running MSN Busi­ness Development, which grew from four people when I started to about 90 people when 1 finished. I was generally doing deals, doing transactions, and

negotiating transactions that are depen­dent upon intellectual property. Where previously I was the attorney writing the transactions, now I'm the business development or sales lead, deciding what transaction to try and how to do it for the business. From a market or business perspective, what has caused the most significant change in how IV does business in the past five years?

IV itself has gone through quite a few changes. It was only four and a half to five years ago that IV started litigat­ing to protect its intellectual property (IP) rights. But, enforcement is really the only option a patent owner has when faced with a situation where a company is using inventions owned by IV in its products or services and the company is unwilling to negotiate a business solu­tion. That's an unfortunate by-product of a patent being a negative right. IV didn't want to litigate; it's not an efficient way to monetize intellectual property.

The business model for FV is built around an efficiency model. I like to think my ultimate customer is not the head of intellectual property and not the general counsel but the CFO. If I can sell the CFO on the intelligence of the transaction as just a good business deal to be working with FV, then I think I've succeeded with the type of customer that IV wants. Contrary to the way people want to paint IV, we weren't designed around litigation. If we were, we would never have done what we did in terms of the scale that we apply to the invention creation side of our business.

Cory Van Arsdale is senior vice presi­dent of global licensing at Intellectual Ventures. He manages a team focused on large, complex transactions with major industry licensees and leads the development and execution of select cross-company licensing and strategic acquisition initiatives with such licens­ees. Mr. Van Arsdale has 28 years of experience serving as a CEO, business development and revenue generating professional, acquisitions integration specialist, and intellectual property and technology transactions lawyer.

Prior to joining Intellectual Ventures in 2010, Mr. Van Arsdale was co-principal at Van Arsdale Yeager LLC, a business consultancy emphasizing intellectual property, acquisitions integration, FDA regulatory affairs, start-ups, business model and sales strategy, and business development. Mr. Van Arsdale's partic­ular focus was in the areas of software, online media, video games, and mobile. Throughout his career, Mr. Van Arsdale has held positions at Microsoft, Apple Computer and Sun Microsystems in various legal, management, and busi­ness development positions, including general manager of Microsoft's online services business development and run­ning its mobile and in-game advertising subsidiaries.

Why do all of that stuff? Why take five to seven years to begin to really turn money

Susan P. Pan is a partner of Sughrue Mion, PLLC, in Washington, D.C. She specializes in patent prosecution and strategy, especially in communications, medical device, and signal processing technologies. She can be reached at span@sughrue.com.

Mr. Van Arsdale received his bachelor's degree in economics from the Univer­sity of California and his J.D. from the Santa Clara University School of Law.

September/October 2015 • LANDSLIDE 5

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create all inventions in-house. ISF and Global Good are frequently in the news. For example, Global Good has been in the news about developing the mos­quito fence, the cold chain device, and all sorts of cool things. ISF holds a lot of invention sessions. The sessions involve Nathan and a group of experts he hand selects. You put together a problem set, and bring together a panel of experts and try to create inventions that will help solve the problem. There are intradisci-plinary panels that do this. For example, Nathan might pair a surgeon with a physicist and a disease expert to work on something related to malaria. He loves having different viewpoints of sci­ence and technology approach a problem because sometimes one discipline would say, "If only we knew how to do X," and another discipline would answer, "Well, actually X is easy if you do it like this." The other discipline didn't even know that X was the problem.

IDF uses the IVIN network of inven­tors to develop inventions outside of IV. We have relationships with 4,000 active inventors and 400 universities and insti­tutions in our international network. Although the United States is the lead­ing source of IDF inventions, we have a significant number of Chinese pro­fessors or individual inventors who are leaders in their field, as well as inven­tors from dozens of other countries. You asked previously about an RFI. An IDF RFI is really a broadcast problem set that IDF sends to the network look­ing for invention solutions. Relevant inventors will then try to make some meaningful contribution to solve the problem. Think of the invention ques­tion as initiated either by IV folks or by third parties that want to essentially do an R&D hedge and sponsor inventions in their areas. So they sponsor the RFI and its results.

For ISF, companies can sponsor invention sessions. A typical session can go anywhere from four to 15 hours or sometimes run over a day or two, and the results vary greatly. For both IDF RFIs and ISF invention sessions, we capture the ideas. We capture thou­sands of ideas, and then we triage to see if people are already working of them. Is there something already here? No? Yes? Is this viable? Is this doable? Is

we've done quite well for our strategic investors and our customers. How does IV decide when it needs to issue a request for invention (RFI), or decide that it needs to acquire an exist­ing patent?

Our Invention Development Fund (IDF) partners to create patents, gen­erally using an RFI process. Our buying fund. Invention Investment Fund (IIF), looks to buy existing pat­ents. In IIF, we've looked at more than 400,000 assets in our history, and we've acquired more than 70,000. We have 40,000+ still in active monetization. No company has that scale. But all com­panies may choose to benefit from that that scale by becoming our customers, and that's the financial proposition.

On the creation side, IDF puts cap­ital behind inventions and creations developed using our invention network (Intellectual Ventures Invention Net­work, or IVIN), where thousands of inventors can collaborate with IV to develop new patents and inventions. So, we put our capital behind creating patents to try to create a more efficient market than previously existed to serve our customers.

Our investor model includes both strategic and financial investors. Finan­cial investors invest in the financial proposition of the fund. Strategic inves­tors invest in the financial proposition of the fund and also license some or all of our assets. In addition, let me explain what I mean by a strategic investor ver­sus a customer. We're in our third IIF buying fund (IIF3) and our second Invention Science Fund (ISF2). The basic job of the IIF buying funds is to buy existing patents and license them to customers, and the basic job of the ISF creating funds is to create inven­tions and license them to customers. By customers, we mean both strate­gic investors and licensees who are not investors. Licensees do not invest and only need a license. Strategic investors invest and need a license. Customers can take a license, work with us to cre­ate patents, or some combination of both. The buying funds and creating funds both grant licenses and sell pat­ents to customers.

We have two creation funds, IDF and ISF. ISF is pretty much where we

around? Well, it's because the founders believe in invention and its value.

Some companies have been built on inventions and patents but relatively few by comparison. On the creation side of our business, we're building the patents first, and then building the companies around those ideas. Most people don't start that way. Coupled with the buying and partnering sides of the business, we're trying to build invention capital. When we buy, we buy at "scale," using billions of dollars of investment, and that has huge benefits to our customers because the market was uncertain in terms of valuing pat­ents. The one-off inventor or the one-off company or the one-off attorney who bought a patent and came in and talked to you about this intriguing patent makes for a highly inefficient market. In every large company, you would have somebody coming in and ask­ing you for money or a deal in one way or the other. "You're infringing on my intellectual property," or "You should deal with me because we have great products," or "You should distribute my product over their product," or what­ever it is—that's a daily occurrence. When multiple people come in and say, "You're infringing on my one or two patents," it's not a very efficient way to analyze a value question in the broader context of the universe of patents that may be applicable to that company's current and future product lines.

As the head of global licensing for IV, I have been trying to accomplish that efficiency with our customers. Now a lot of people want to translate value the way that it has always been trans­lated—you have a patent, but if it's any good, it has to read on our products. That's not an unreasonable thing to ask. But if everything is translated into that conversation, that's the old way of deal­ing the patent, and that's a problem. The fact that we may have to go to liti­gation to ultimately prove the value of the patent is not efficient. We're try­ing to create an efficient marketplace as much as we can. Our value proposi­tion is to build an attractive portfolio of assets that are valuable to our custom­ers today and tomorrow and to provide an efficient transaction for them to avail themselves of the portfolios. We think

6 LANDSLIDE • September/October 2015

I

is no set approach other than to make the specific patent-by-patent case. A set approach there is kind of hard. You look at precedents, you look at other licenses that may have occurred, you look at the history of the patent litiga­tion in that particular market, and so on and so forth. You factor in the age of the portfolio, the terms, and the life of the patent. You factor in all of that and try to come to a relatively objective value, so you then translate the approach to the next company. All of those factors translate, and everybody wants to bring all of those things up again. But you may be talking about a different patent for the next company or a different set of patents. There will be some overlap but not 100 percent. From a patent law perspective, what change has had the biggest impact on IV in the past five years (i.e., case law or title 35 section)?

I think Alice has impacted the business with respect to software and computer-implemented inventions. In the aftermath of that, you have a lot of decisions that have to occur to sort things out, which is typical of any Supreme Court case. There are a lot of considerations: Does the deci­sion go this far? Or does it go that far? Or did it really change existing law? What about this example? That's all still shak­ing out, and because it's still shaking out, there's uncertainty in the market particu­larly when it comes to patent protection for software.

The United States Patent and Trademark Office (USPTO) review proceedings created by the America Invents Act (AIA) have also created some uncertainty in the market. If you take everything that's occurring in the USPTO right now at face value, you're seeing what seems like far too many good patents being invalidated. You also see certain accused infringers or their friends and indemnifiers abusing the USPTO proceedings in a way that surely was not intended by Congress. So, the net result of the Alice decision and the AIA is increased uncertainty about the value of patents, which makes licensing more difficult.

At the minimum, people are think­ing, "Well, I'm going to wait and see."

Nathan once used an example of a building on a piece of property. There

looking at our public announcements on the deals that we've closed.

As for the question if the available portfolio is different for licensing than for litigation defensive purposes, the answer is no. We're building a market for patents, so the way that we think of it is everything has a "buy it now" or a "license it now" price. Anything that we have in the portfolio can, and should, be for sale or for licensing, at this moment. The only exception is if we do have something in litigation. We have to con­tinue to control that asset or it couldn't be part of the litigation otherwise. Does IV use a set approach in setting the valuation for licensing royalties?

For licensing purposes, there's no set approach. There will be industry fac­tors. We will try to develop, as much as possible, a rate card and show how the rate card applies individually, com­pany by company. Of course, a rate card by definition has to be proven out of some objective market. Proof can't just be what we say it is. So, we will try to establish a rate card, then we will go out into the marketplace and try to see if that's a viable rate card. If it is, then it will start to become a slightly more set approach. Then you can say that 10 other companies license using this rate card, and it does have an effec­tive value, and we should use this rate card. Then, the only variable will be what is the coverage, or what does this company do? We will try to do that particularly in what I call "long tail" markets. A long tail market is a mar­ket where a lot of companies essentially do the same thing in the same way, and therefore are likely to have patents that cover those things—the same patents cover all of those things.

Concentrated markets and the other categories that we think about are more like the tech companies. You would think that tech companies have a sub­stantial overlap on how they do things, but they generally don't. There are a relatively few number of players in a particular market—a handful, or under 10, meaningful players. Invariably, in my experience, they often do things very differently. You cannot say, "Here is patent A, and everybody says that patent A covers all that you do on wid­get X." It's not true generally. So, there

we've purchased roughly 70,000 pat­ents, we only have about 40,000 patents in monetization. There are things that were inactive when we bought them or have either expired or we abandoned, because we didn't think they were stra­tegically or critically important to either our licensees or monetization. This is normal large portfolio management. What is the typical source of patent acquisition?

We've infused more than $2.3 billion into the economy since 2000 as a result of our patent purchases. The breakdown is about $240 million paid to midsized companies; $730 million to large com­panies; $1.35 billion to others, and that's split up into $510 million to indepen­dent inventors, $720 million to startups and small enterprises; and $110 million to universities and government, so those are our general sources of acquisition. This is just the capital that we put out in the market and how it splits up.

Another channel for us is buying patent assets from companies that failed for one reason or another. They could have failed because of bad manage­ment, a bad product, or wrong timing. It could be anything but the patent. Take Nortel as an example—we did not purchase that portfolio, but obviously patents can have independent and sig­nificant value. That was part of our goal around the buying fund to create a more objective market about value. We did organize and participate in a consortium of companies that purchased a valuable portfolio of patents from Kodak as part of Kodak's restructuring. We were able to facilitate a large infusion of much-needed cash into Kodak, and secure access to some very significant intel­lectual property for our company and fellow consortium participants. Can you comment on some of the deals that you've done in terms of the placing that you do for global licensing?

I can't comment on the quantity or terms, and in some cases, I can't even tell you who. It's all confidential. This comes from general uncertainty in the marketplace for people about this busi­ness. What I can tell you is that we've had a really good year, a really good first quarter Q1 and really good Q2 so far. You can extrapolate some of that by

8 LANDSLIDE • September/October 2015

are huge numbers of free-market busi­nesses that support that. There are the people who loan the money to the builders, there are the people who loan the money to buy the land, there are the people who develop the land, and there are the people who do all of the in-between services, just so some­one can put up an office building on a piece of property. Now think about the asset class of patents. It's lacking in so many fundamental free-market sup­port structures as an asset class, which is one of the reasons as an asset class it has always been so difficult to value. There have been huge mistakes on both sides. To reference Nortel again, shareholders sold their stock when Nor­tel was bankrupt, thinking the assets were only worth a billion dollars. Then the patents, which were written off in book value a long time before, sell for four billion. That was a dra­matic inefficiency in the marketplace in understanding what Nortel really had, much less in monetizing it.

You can argue Alice has created more efficiency establishing what's patent-eligible and what's not. You can also argue that the outtake oi Alice is that there is a lot more uncertainty

about exactly what that means—what's patent-eligible and what's not—and that it's going to take a while to figure it out. I like to think long-term about our pat­ent system and how it is one of the most successful in the world, by 10 orders of magnitude. Eventually, the courts work out logical solutions. However, in the aftermath of both Alice and the AIA, we have a lot of new inefficiencies; we have a lot of abuses of the system. Look at the hedge fund threatening and filing inter partes reviews (IPRs) or cov­ered business method patent reviews (CBMs) against pharma companies, and then shorting the companies' stocks. That's an arbitrage opportunity because there are huge inefficiencies off the top. The fact that nondefendants can file an unlimited number of IPRs is a huge inefficiency that creates uncertainty in the market. It's good money for pat­ent practitioners, but it's not necessarily great for creating a more efficient mar­ket, and the big danger is diluting the value of patents across the board. Anything else for our readers in closing?

The only thing I would leave you with is something that I touched on ear­lier. I've spoken to IP law associations.

and they are a receptive audience. We have an incredibly powerful and great system of IP protection. The changes that people want to run though some­times are knee-jerk or sometimes are not. We need to always keep in mind the value of our system and what it has built for this country. I think people sometimes lose sight of that in the heat of the moment. We at IV have never lost sight of that. We built our company around the concept of patents—inven­tion—as an asset class for investment, and that's not anything anyone else has ever done. At IV, we're really putting everything at stake everyday about that concept. I would hope that IP profes­sionals recognize that. They may not always agree with what we're trying to do or our results, but they should recog­nize that's where it comes from. There are others in the market that would benefit from a weaker patent system, but those companies are being short­sighted. Whatever short-term gains might be had by a handful of compa­nies will ultimately be outweighed by the harm to innovation and global com­petitiveness that results from a toothless IP system of laws. •

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September/October 2015 • LANDSLIDE 9