Founded in 2008, RPX Corporation (NASDAQ:RPXC) operates under a novel business model as a defensive patent aggregator.
What's At Stake?
The cornerstone of RPX's business model is the fear of patent litigation that larger companies have. Remove that, and RPX ceases to be a valuable enterprise service. The purpose of a business is to get into a sales situation to generate a valuable transaction, or "create a customer," as Peter Drucker said.
NPEs (non practicing entities) or "Patent Trolls" do not create or sell anything, but rather acquire patents and then use those patent rights to litigate against businesses and sometimes end users of their claimed invention. The current relative ease of patent litigation is the selling point of RPX's defensive patent aggregation service to enterprise clients. Indeed, between 2007 and 2011, there was a 40% rise in patent lawsuits.
However, it appears that Congress has finally had enough of the patent troll problem, and has introduced a litany of patent reform bills. The very thing that helped RPX to grow rapidly; a litigious friendly patent system may now be close to change...
"The Innovation Act" - H.R. 3309 & H.R. 9
Passage of proposed changes in patent law could substantially harm RPX's business. Legislative risk is thus a key risk for RPX shareholders.
Republicans now control both the Senate and House of the 114th United States Congress running until January 3, 2017. The 45th United States President succeeding President Barack Obama takes office shortly thereafter on January 21, 2017.
At issue to RPX shareholders is the Innovation Act which originated with the 113th United States Congress, H.R. 3309. The bill passed the House on December 5, 2013 with a 325-91 vote, which was then Republican controlled. However, it never passed the then Democrat-controlled Senate. However, the bill clearly has bi-partisan appeal.
H.R. 3309 makes it substantially more difficult for NPEs to litigate patent claims. Among the ways patent litigation is made more difficult by the act:
- Patent plaintiffs must make a specific claim of patent infringement (currently, due to a "quirk" vague claims are allowed)
- Patent plaintiffs losing their suit would be required to repay the legal fees of the defendant
- The bill makes the discovery phase harder for Plaintiffs, by defining "core documentary evidence" which is paid for by the defendant, and all additional discovery would be paid for by the Plaintiff
"The Innovation Act," H.R. 3309 was re-introduced as H.R. 9 on 2/4/2015 by Rep. Bob Goodlatte (R-VA), its original sponsor. The bill thus refuses to go away and had accumulated 26 co-sponsors as of June 9, 2015.
Big Patent Law Changes In The Past: Future Too?
The Leahy-Smith America Invents Act was a transformative overhaul of the patent system, changing it from a "first to invent" to "first to file" system signed into law September 16, 2011. It encompassed many changes and was the largest overhaul of the patent system since 1952. H.R. 9 amends code in the Leahy-Smith Act and Title 35 of the US Code.
Intellius Acquisition Impact
RPX corporation acquired Inventus Solutions for $232M in cash in a transaction unanimously approved by Inventus shareholders in Dec. 2015. Inventus is a "top 10" leader in discovery management software. The company is expected to add $50-60M in revenue. There was no mention of the acquisition being net accretive to earnings in the press release; however, "above average margins" were cited; specifically 25-30% EBITDA margins (PDF link).
From the 10-K: "The transaction expands our business into the litigation discovery management market." It's also a sizable transaction considering it's larger than RPX's entire retained earnings year ended 2015 of $172M.
Passage of H.R. 9 could negatively affect the value of Inventus as well, insomuch as companies will feel less compelled to purchase e-discovery solutions if they are not compelled to pay for more than "core documentary evidence" in patent litigation proceedings. It's not that Intellius's >1000 customers across energy, technology, healthcare and other verticals will suddenly disappear. Intellius on a whole would make less sense for companies worried about the patent litigation discovery process, costing them substantial unrecoverable sums of money if plaintiffs have to start paying up.
RPX shareholders should keep awareness of the various anti-patent troll bills. In February 2016, a Senate committee approved H.R. 9 for consideration. RPX is speculative due to its outsized current legislative risk brought about by this and other anti-patent troll bills.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.