Nathan Myhrvold
Intellectual Ventures

Nathan Myhrvold's Patent Extortion Fund Is Reaping Hundreds Of Millions of Dollars

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Don’t blame Nathan Myhrvold for taking advantage of the culture of rampant patent litigation in this country. He is only doing what large companies with vast patent portfolios such as IBM and Microsoft do on a daily basis: use the threat of patent infringement litigation to strike lucrative patent licensing deals. Except Myhrvold, who used to be Bill Gates’ right-hand man at Microsoft during the 1990s, does it through his patent-gobbling fund, Intellectual Ventures. The fund has collected more than 20,000 patents on the cheap from universities, inventors, and bankrupt companies, which it then uses to extract hefty licensing fees from some of the biggest companies in the world.

Since he started Intellectual Ventures eight years ago, he has returned $1 billion in licensing fees to investors, he tells the WSJ. Those investors include some of the same companies who are licensing his patents: Sony, Nokia, Microsoft, Intel, Google, eBay, SAP, and Nvidia. A story in today’s WSJ (behind the pay wall, unfortunately), details how companies like Cisco and Verizon are ponying up hundreds of millions of dollars each to stay (and how others, like Comcast, refuse to pay). Excerpt:

In recent months Mr. Myhrvold’s firm, Intellectual Ventures, has secured payments in the range of $200 million to $400 million from companies including telecom giant Verizon Communications Inc. and networking-gear maker Cisco Systems Inc., according to people familiar with the situation. Verizon, for instance, disclosed in a July filing with the Securities and Exchange Commission that it plans to pay as much as $350 million for patent licenses and an equity stake in a patent-holding investment fund. The company operating that investment fund is Intellectual Ventures, according to a person familiar with the terms of the deal.

And here is the extortion part:

In many cases, companies that make these license payments also become investors in Mr. Myhrvold’s firm. . . . Intellectual Ventures, which has about $5 billion under management, bears some similarities to a private-equity firm that operates investment funds for the benefit of investors. However, its largest fund has an unusual structure in which fund investors are also responsible for the lion’s share of the fund’s returns.

It works like this: Technology companies agree to pay patent-licensing fees to inoculate themselves against potential lawsuits by Intellectual Ventures. These fees are how the fund generates its returns. As part of the deal, though, these same companies also put up the cash Mr. Myhrvold uses to buy more patents, receiving an equity stake in the fund in return. (Some companies don’t obtain long-term patent licenses, but instead get shorter “guillotine” licenses that must be renewed periodically.)

Mr. Myhrvold, who has a staff of 400 (including an army of patent lawyers), collects an annual 2% management fee from investors, according to several people familiar with the fee structure. Intellectual Ventures also keeps a percentage of any gains.

It is a virtuous cycle. Intellectual Ventures recently closed a $1.5 billion patent fund, and is now raising another $2.5 billion one. And copycat companies like RPX Corporation (headed up by a former Intellectual Ventures executive and backed by Kleiner Perkins and Charles River Ventures) are beginning to pop up.

But like I said: Don’t get mad at Myhrvold and his ilk for capitalizing on a broken patent system. Instead, we should fix the patent system so that it rewards invention over litigation.

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