Inside Intellectual Ventures, the most hated company in tech
Nathan Myhrvold and other executives at the controversial company say critics simply don't understand what they're doing. CNET went behind the scenes to understand what 40,000 patents and an unapologetic plan to make money from them really means.
Jim KerstetterStaff writer, CNET News
Jim Kerstetter has been writing about the high-tech industry since the 1990s. He has been a senior editor at PC Week and a Silicon Valley correspondent at BusinessWeek. He is now senior executive editor at CNET News. He moved back to Boston because he missed the Red Sox. E-mail Jim.
Josh Lowensohn joined CNET in 2006 and now covers Apple. Before that, Josh wrote about everything from new Web start-ups, to remote-controlled robots that watch your house. Prior to joining CNET, Josh covered breaking video game news, as well as reviewing game software. His current console favorite is the Xbox 360.
BELLEVUE, Wash. -- To many in the high-tech business, a troll plots his schemes in a white office building on a hill in this leafy suburb of Seattle.
This is the home of Intellectual Ventures, which, depending on whom you ask, is either the biggest, most aggressive patent troll on the planet or a pioneering company that's helping inventors get their fair share.
The question of "whom you ask" is a big one, of course. Since it was founded in 2000 by Microsoft veterans Nathan Myhrvold and Edward Jung, Intellectual Ventures has -- through $5 billion in investment funds and its own brainstorming efforts -- collected nearly 70,000 "intellectual assets" on technologies ranging from nuclear power to camera lenses. It currently controls about 40,000 intellectual assets.
In the process, Intellectual Ventures has become a boogieman for aspiring entrepreneurs and big tech companies alike. (Ironic, since some of its early investors include Microsoft, Intel, Sony, Nokia, Apple, Google, and eBay.) Rolling out a new feature for your Web site? Have a better way to reflect light through a camera lens? Better watch out, Intellectual Ventures might have a patent for that.
Not surprisingly, Myhrvold was in the hot seat at the spring All Things D conference in Palos Verdes, Calif. where he was grilled on stage by veteran technology columnist Walt Mossberg. And Intellectual Ventures last year was raked across the coals in a one-hour radio segment on "This American Life" -- a terribly "one-sided" report that "irresponsibly" compared Intellectual Ventures to the Mafia coming to your butcher shop and demanding protection money, argued Intellectual Ventures president Adriane Brown.
Suffice to say, Intellectual Ventures is, in the minds of many, the world's biggest patent troll, waiting to demand a fee for what you were sure was an original idea. Is it the most hated company in tech? Well, you'd be hard pressed to find another outfit that causes quite as much outrage in Silicon Valley.
"Nathan Myhrvold is a very, very, very smart man. He may be the wealthiest man on Earth when all is said and done," said Jonathan Schwartz, CEO of the health care startup CareZone and the former chief exec of Sun Microsystems. "Congratulations on arbitraging the patent system."
Is that a fair dig? CNET went behind the scenes at Intellectual Ventures to gain a better understanding of how exactly this company works. To hear people there tell it, they are the furthest thing from a troll. Instead, they are pioneering the concept of what they call "invention capital." In a series of interviews, Intellectual Ventures executives explained how their company works and how they hope to make money from concepts such as old-fashioned brainstorming sessions and "requests for invention" sent out to a collective of scientists, inventors, and big thinkers.
What we found was an 800-person company with a split personality: On one side is a think tank, where people with big ideas get together and dream up ways to solve big problems, from keeping vaccines refrigerated where there is little electricity to improving the lenses of cameras.
The fun side of the business
The think tank has spun off two businesses. The first was TerraPower, a company that's building a new, cleaner nuclear reactor. The second, expected to be announced today, is Kymeta. With $12 million in funding from Bill Gates, Liberty Global, and Lux Capital, Kymeta is intended to use so-called metamaterials to produce antennas that improve satellite connections to everything from airplanes to individual hotspots. (Go here for more on Kymeta.)
This is the fun side of the business, where the quirky tastes of the billionaire Myhrvold shine through. Wondering why there's a giant Tyrannosaurus Rex head against one wall? Well, that's a T-Rex model used in the movie "Jurassic Park." Myhrvold never gave up a boyhood enthusiasm for dinosaurs and his Microsoft fortune has more than allowed him to indulge in paleontology. There are several full fossil collections in the building, and he has more stored in a nearby warehouse.
There's also a collection of antique typewriters and other mechanical devices in the lobby, not to mention the wall-sized landscape photos the camera buff Myhrvold has taken on his trips around the world. Drive a few miles to Intellectual Ventures' labs, you'll also find a high-tech testing kitchen, where breakthroughs such as the perfect way to grill steak have been developed. Modern gastronomy is no passing fancy here. Myhrvold's $625, 2,438-page cookbook, "Modernist Cuisine: The Art and Science of Cooking," recently won two prestigious James Beard awards, one of them for cookbook of the year.
Fun stuff, right? But the other side of Intellectual Ventures, for lack of a better word, is the troll business, an aggressive, lawyer-driven organization looking to make money from the many, many patents it owns, whether you like it or not. You don't see that part of the business celebrated in the lobby. But it's a big reason why all the fun stuff is here.
Intellectual Ventures employees acknowledge their unpleasant public image but argue that they're trying to turn that around. Lawsuits? Sure, they happen, executives say, but Intellectual Ventures has only been directly involved in a handful of them (more on that later). What they are really trying to to do, executives argue, is make sure inventors get their fair share. Invention should not be charity work, Myhrvold has often argued, people should get paid for it.
"The set of incentives that go around patents, that's part of how the system works. Inventors should get rich. We should have more inventors. It's good for everybody," he said at the D conference.
Seems like a reasonable point. So why then does the mere mention of Intellectual Ventures enrage so many people? Isn't it reasonable that you should have to pay a license fee (the core of their business) in order to use technology covered by someone else's patent? We'd have liked to ask Myhrvold ourselves, but through a spokesperson he declined repeated requests to even answer a short list of e-mailed questions.
So we'll do our best to answer the question for him. Let's start with size. Intellectual Ventures says it now controls nearly 40,000 intellectual assets. That's another way to say patents or pending patents. Some legal academics question that number. But if it's true, that makes Myhrvold's company among the largest patent owners in the United States.
Myhrvold has often described his company and its $5 billion in funds raised in terms of venture capital, and that's troubling to people who know how venture capital works. Although the exact time frame for the return on that money raised is unclear, researchers at the University of California's Hastings School of Law estimate that in order for a 10-year fund of that size to be successful, Intellectual Ventures would have to generate $40 billion in revenue through licensing, partnerships, and, yes, litigation.
"I don't know how they're going to recover money on all these patents they've purchased unless they engage in troll-like behavior," said Michael Meurer, a professor at the Boston University School of Law who has studied the impact of companies like Intellectual Ventures on the economy.
Last year, Intellectual Ventures disclosed that it had generated $2 billion in license revenues from its patents. Though the company hasn't updated that figure, it's expected to be significantly higher today. Intellectual Ventures has so far disclosed that 30 companies, ranging from German software maker SAP to Samsung and HTC, have licensed its patents. Many of its investors have also licensed patents.
And there's the matter of secrecy. Tom Ewing and Robin Feldman, the researchers at Hastings, found 1,276 shell companies associated with Intellectual Ventures. Those shell companies are used for purchasing and holding patents, and as of May last year they held roughly 8,000 U.S. patents and another 3,000 that were pending. The Ewing/Feldman research was published in the Stanford Technology Law Review.
Brown said that the shell companies were mostly used in the early years of the company in order to keep people from poaching ideas and that Intellectual Ventures has moved away from them in recent years.
To get an even deeper understanding of why Intellectual Ventures sets hairs on end in the tech set, let's take a trip through patent litigation history all the way to 1992. That was the year the Federal Circuit Court of Appeals made a series of decisions that expanded patent law away from what we think of when we think of patents -- gadgets and other tangible inventions -- into more nebulous areas such as software. Complicating matters was an explosion of ideas around the Internet, which was quickly expanding into new corners of the business and consumer world, said Meurer.
Built for litigation
The second big development in this historical trip is the rise of what lawyers call non-practicing entities, or NPEs. NPEs are essentially companies that own intellectual property but don't make any real products.
This gives them a few advantages in the courtroom. First, they're not as vulnerable to counter-claims of patent infringement because, well, they don't make anything that could be stepping on someone else's intellectual property. Second, because these companies are built for litigation, they're not afraid of its costs. Sue Google, and its executives are drawn away from product development, hiring and firing, and all the sorts of things you'd expect from an executive. They have to provide testimony, hand over e-mails, delay product launches, and interrupt the entire company's day-to-day work in order to meet discovery requests. But at an NPE, discovery costs are much lower because there are no products.
"I think the patent system favors non-operating entities," Schwartz added in a recent interview. "That's what's really scary, because now you've got somebody who's got nothing to lose."
Intellectual Ventures is an NPE, and most likely the biggest NPE by a wide margin.
NPE litigation is growing rapidly, affecting 5,842 defendants in 2011, according to research released in June by Meurer and his BU School of Law colleague, James Bessen. That's roughly a quadruple jump from just six years earlier. And it wasn't just big companies getting sued. The median company sued had $10.8 million in annual revenue, while 82 percent of the defendants had less than $100 million in revenue.
And any sort of patent litigation can be deadly to startups. A survey conducted last year by the American Intellectual Property Law Association to find median litigation costs for patent infringement suitsfound that for a claim that could be worth less than a $1 million, median legal costs are $650,000. When $1 million to $25 million is considered "at risk," total litigation costs can hit $2.5 million. For a claim over $25 million, median legal costs are $5 million.
That's just to fight the lawsuit. It doesn't include what it could cost to pay to settle (which is usually what happens) or if the defendant goes all the way to court and loses.
And there are other costs, which Meurer refers to as the other half of "social impact." Social impact is an economist's term to describe the cost of litigation and harder-to-define losses such as the disincentive to innovate because someone may be out there with a patent they intend to enforce.
Before we go any further, let's acknowledge there's a certain hypocrisy in the tech industry's open disdain for Intellectual Ventures. Apple and Samsung, for instance, are engaged in a multibillion-dollar court fight in San Jose, Calif. over patents that Apple says Samsung has violated. Patents have become just another hammer to throw at competitors, knock them off their game, or maybe even knock them out of the game.
IBM has been enforcing its patents for decades. And other companies -- yes, including industry darlings such as Apple, Google, and Facebook -- are spending billions to acquire patents. True, some say they are strictly for defensive purposes (you sue us, we'll sue you right back). But that's merely a promise. It's not exactly a legally binding contract with the public. And as the Apple v. Samsung case proves, they're hardly squeamish about heading to court to enforce their intellectual property rights.
"You want to have animosity, go ahead. I wasn't a popular kid in school and I guess I'm not here. If I want popularity, I go to a chef's convention. Things that are important aren't always popular at first."
It's a typically rainy morning here in Bellevue, and Casey Tegreene, an executive vice president at Intellectual Ventures as well as its chief patent counsel, is reminiscing about the company's first "invention session."
Tegreene, who looks like he's dressed for a hike in the surrounding mountains rather than a courtroom, has an unusual background in law and product development that isn't so unusual at Intellectual Ventures. He's been a chief technology officer and a lawyer, and now the chatty lawyer/technologist is a little of both. That's a pretty typical pedigree here at Intellectual Ventures.
When Intellectual Ventures isn't buying up patents from others, it creates them in-house. The first session was held in a converted auto body shop in August, 2003. Tegreene says these closed-door brainstorming events are a lot like locking up people in a room with one another, and not leaving until inventions come out. "It's a form of problem solving, but more open-ended," Tegreene says.
On the docket for that first session were camera sensors, something near and dear to Myhrvold. He wanted to bring some of the low-light sensor technology people were using to enhance stargazing in electronic telescopes into the tiny sensors and lenses found in consumer-grade cameras. The team, which Tegreene described as a "diverse" group of people, proceeded to spend more than eight hours throwing around ideas and proposing solutions.
In the end, they came away with an idea for a specialized low-noise circuit, along with several other ideas that resulted in more than 100 patent filings and 50 patents. Tegreene says that number varies from session to session, depending on who is there and what ideas are being thrown around.
"Sometimes we hardly get any and sometimes we get a lot," Tegreene says. "There can be 40 to 100 ideas, then we filter them."
Over the years, the company has come up with 500 patents and 4,000 patent applications from these sessions (the company now averages about 30 new patents per month). Those sessions now take place in a conference room inside the company's main lab in Bellevue. Here, whiteboards and monitors are affixed to nearly every wall, though popping your head in, you might simply think this is where the lab's staff has its every-day meetings.
The inventors' network
Most of Intellectual Ventures' growth took place between 2008 and 2009, says Brown, the company's president and chief operating officer. Brown joined the company a year after that boom in 2010, leaving her spot as the President and CEO of Honeywell's transportation division. She says part of her job has been to structure the company in a way that "moves the needle without always adding heads."
One of the ways Intellectual Ventures does that is by using outsiders to drum up ideas that the company can choose from and invest in. In other words it outsources some of the grunt work of turning ideas into patents and other intellectual property. It has done that by creating a network of 3,000 inventors at universities, and more than 400 companies and research institutions.
But before Intellectual Ventures even taps that group, the company puts together a proposal called a "request for ideas" -- a play on the old request for proposal or RFP -- for what it wants. This 10-page document is the result of putting together one of the company's technologists, a business development specialist, and a lawyer together to try and find trends that are going on in any particular field.
"We think of the problem we want to solve," says Tim Londergan, Intellectual Ventures' senior director of investment strategy. "[We] find great inventions and get them to market."
Londergan wouldn't share what one of these proposals looks like, and those who are a part of its network are sworn to secrecy. That includes how much they get if their idea is the one that gets picked, something Londergan says includes an up-front cash payment and royalties.
Gregory Phelan, managing partner at Seattle Polymers and an associate professor of chemistry at State University of New York, is one of those inventors. He and his company, which has five employees give or take, have been working with Intellectual Ventures for more than three years.
"The most common thing we will do with them is they will come to us and say, 'Here's a problem, do you have an idea how to solve it?'" Phelan says. He won't talk about the financial terms of his work with Intellectual Ventures, but he says he's never been asked to take part in "troll" activity. In fact, he says Intellectual Ventures as a bodyguard of sorts, a big threat to companies that would happily step on his intellectual property.
"We can be vulnerable. This is a small group," Phelan says, " And the temptation might be for someone to say, "Fine, we'll see you in court.' I can't do that.... for a single inventor or a single entity it's very hard to go through."
Intellectual Ventures as a protector of ideas rather than an exploiter of patent law? To Phelan, that's exactly what they are.
The coolest bug zapper ever
Drive a few zig-zagging miles through Bellevue's suburban sprawl and you come across a set of nondescript warehouses that house the labs of Intellectual Ventures. It's raining hard now, and Geoff Deane, vice president of engineering and the labs' chief, is handing out giant golf umbrellas to a small tour group walking between buildings.
Like the lobby of the main office, the artifacts of scientific quirkiness are proudly on display. Walk through the door at the labs' main facility you're greeted to a skeleton wearing safety goggles and a lab coat with the name "lab intern" on a metallic name badge. Above its head is a well-known device the company designed -- one of its few public inventions -- which shoots mosquitos out of the air with lasers. This is a place, the decor seems to imply, where invention is supposed to be fun.
"Here, let me go blow on them," Deane says excitedly. "Otherwise, they just kind of sit there."
Someone else at the lab overhears Deane, and hustles across the room to the small, otherwise inconspicuous tube that blows air into a tank full of the blood suckers. Our attention is averted to a nearby TV screen that shows the "kills" in real time, though for safety's sake, the machine is currently using a murder-free green laser that simply targets them.
Inside the lab is just about every machine you could imagine, and many you may have never heard of. From microscopes, to 3D printers and a specialty saw that uses water to cut through inch-thick sheets of aluminum. There's even a climate-controlled room where the company raises mosquitos, something Deane says is surprisingly difficult.
All this gear is here so that the company can move quickly when it wants to fast-track an idea, Deane says. Along the way it has purchased up rooms full of equipment for that task -- some of it new, and some of it decades old. There's so much of it the lab is spread across three buildings, one of which houses a supercomputer with a five-figure monthly energy bill. There's even another storage facility where Intellectual Ventures stashes things it bought, but doesn't necessarily need yet, including a massive machine designed to bend airplane wings.
Just in case.
During our tour we're shown a very small handful of public-facing projects, including Cold Chain, a special insulated cooler that looks a lot like a big milk jug, which is designed to keep vaccines chilled for months at a time. The Gates Foundation specifically asked Intellectual Ventures to build it.
We also get a peek at the company's metamaterials project, which Deane says might just revolutionize the way information is sent around the planet. Other stops include a look at the kitchen and photography studio where Myhrvold's "Modernist Cuisine" was researched and later photographed (yes, it smells amazing), and rooms containing high-energy microscopes the company is using as part of a project to more quickly and cheaply identify malaria.
Short of that room full of mosquitos, it's easy to take all these good things and think of Intellectual Ventures as nothing short of a savior to humankind. But gadgets like vaccine chillers, high-tech satellite dishes, and laser-guided bug killers are not why Intellectual Ventures is disliked.
What it all comes back to is the scope and scale of the rest of the company's business. And did we mention privateers?
Ahoy, a web of confusion
Intellectual Ventures says it is involved in 10 patent lawsuits: Nine where it's taken companies ranging from Symantec to Wal-Mart to court and another where Xilinx has asked the court to invalidate Intellectual Ventures' patents (ironic, since Xilinx is listed as an investor in Intellectual Ventures). While that doesn't sound like much for a company with tens of thousands of patents, the Hastings law school researchers say that only tells part of the story.
A privateer, you may recall from high school history, was a ship hired by, say, the British crown to attack Spanish merchant ships and steal their loot. It was an easy way to engage in skirmishes on the high seas without actually going to war with Spain.
Until recently, according to the Hastings researchers, Intellectual Ventures would sell a patent to another licensing company, and that company could if it wanted to head to court to enforce the patent. While it's hard to say for sure how often this occurs the researchers found several examples of patents they had identified as owned by Intellectual Venture shell companies that were, in turn, sold to other companies which, in turn, sued companies such as Samsung, Hewlett-Packard, Kodak, and CBS Radio (which is owned by CNET's parent company, CBS).
In another example, Avistar Communications sold 41 patents and applications to Intellectual Ventures in 2009, according to the Stanford researchers. In June 2010, Intellectual ventures sold those patents to a company called Pragmatus, a small company that specializes in so-called patent monetization. Since then, Pragmatus has been busy. It used three of those patents to sue Facebook, YouTube, LinkedIn, and PhotoBucket five months after it acquired them. And in February 2012, it filed a complaint with the International Trade Commission against nine other companies, including Samsung and Research in Motion.
An Intellectual Ventures spokesperson said in response to the critical report:
We're aware of that study and the claims it contains. When it makes sense for our business, we occasionally sell patents -- either to companies who want to use them for defensive purposes or to buyers who want to monetize them. Sometimes, based on the structure of the sale, we have a financial interest in the outcome of those efforts, but we never have control over the path to monetization that those companies pursue once we sell the patent.
Confused yet? Don't feel bad. It's an example of the opaque nature of Intellectual Ventures' business that triggers warning bells to so many in tech and the legal community.
As we said earlier, Myhrvold refused to talk with CNET for our story. But he did recently speak with Geekwire's Todd Bishop, a longtime Microsoft reporter in Seattle, about a new position he's creating at Intellectual Ventures, called the vice president of Global Good. The job, in a nutshell, is to find a way to take all that neat stuff in the lab into the real world, to find manufacturing partners and get it to the people who need them.
Myhrvold was just as feisty with Bishop as he was with Walt Mossberg earlier in the year. No, he doesn't think the patent system is broken. In fact, he rightly notes, it's just been reformed in the American Invents Act. Myhrvold also rightly notes that big companies aggressively enforce their patents (and really, where is the outcry for patent reform because of the Apple vs. Samsung patent fight?) so why shouldn't the small companies and university professors aligned with Intellectual Ventures have those same rights? And, lest you forget, Intellectual Ventures isn't just connecting you with your friends. It's trying to help the poorest of the poor. Myhrvold testily responded to a question regarding skeptics:
It turns out it's very easy if you have a technology-centric mindset to think, Ah yes, Zynga, they're doing -- I don't mean to call Zynga out in a negative way, but is Zynga doing God's work? Is Facebook doing God's work? Even setting aside what God's work means, I think it's pretty easy to say, those companies are doing wonderful things, but they are for-profit ventures. It's either tools or toys for the rich. There really is a role in taking great technological ideas and trying to harness them for the poorest people on Earth.
Will Intellectual Ventures make money off these projects? "Fat chance," Myhrvold says. But that's not his concern. He's not about to apologize for the holding companies, for aggressively enforcing his company's patents, for, well, anything that's made his outfit the most hated company in tech.
So there you have it: Intellectual Ventures is a big, often confusing company that's one part think tank, part altruistic do-gooder, and part aggressive litigator. But, as Myhrvold says, it's God's work. Just go with that.