Special Report: World’s First IP Financial Exchange To Come Online This Year

The first financial marketplace for the trading of patent rights is scheduled to go online this year, and other countries are eyeing the United States’ progress with interest.

The Intellectual Property Exchange International (IPXI), www.ipxi.com/, designed by Ocean Tomo, will work much like an emissions cap-and-trade system, but without a ceiling on the number of patent rights allowed to be exchanged. Patents themselves are not traded, rather, the rights to them are.

“It’s an alternative to the typical or traditional bilateral licensing” system, IPXI CEO Gerard Pannekoek told Intellectual Property Watch.

The IPXI was born out of talks with the Illinois Office of Economic Development. Officials there recognised that IP was becoming an asset class, had a vision that a trader market would develop, and facilitated a grant to get it off the ground. They firmly believed such a system should be based in Chicago, which has a long history of innovation in exchanges – including the Chicago Stock Exchange, Chicago Mercantile Exchange for commodities and the Chicago Climate Exchange (CCX).

IPXI leaders have been in talks with some of the largest IP owners in the world on the design of the system; smaller companies, as well as universities, will also participate. IPXI is “market ready and working with a significant group of IP owners to bring the first ULR [unit licence right] offerings to market later this year,” Pannekoek said.

Pannekoek is no stranger to such trading systems. From 2002 to 2005, he served as the founding president and chief operating officer of the CCX, a start-up company that became the world’s first multi-national and multi-sector market for reducing and trading greenhouse gas emissions.

In that capacity he designed, implemented and managed the transition of a unique idea into an actual business, and established the firm’s infrastructure and trading operations in less than 12 months. He also created a strategic alliance with the International Petroleum Exchange in London to establish the European Climate Exchange, which is currently the world’s leading exchange for carbon trading.

Pannekoek is now putting his past experiences to use in launching the IPXI.

How It Works

The way the IPXI works is this: The system mimics that of a public offering of a stock. When a company like IBM goes to market to obtain extra capital, it sells its shares in the company. IBM would write a prospectus, and include an asking price for each share that is underwritten. Investors buy those shares, and the next day, they can start trading.

“What our unit licence right (ULR) contract is, is exactly the same – it’s a public offering of a patent right,” Pannekoek said.

A ULR contract allows a patent holder to licence select technology via standard form licences in publicly disclosed terms. The ULR is the right of the owner (the purchaser) to use the technology in the production or sale of one product. Under IPXI rules, companies still need to prepare a prospectus describing the patent and technologies in detail, including the patent’s entire history, such as market description, market demand estimation, and what rights will be offered at a certain price.

“The difference between a ULR and a stock is that a ULR, by definition, is a consumable commodity,” Pannekoek explained. “In other words, it’s almost like an emission allowance, a carbon right, that once you pollute it, that retires” it.

Take, for example, a patent that involves a type of engine technology. The ULR is traded on IPXI, purchased by a company like Toyota, and the company can then use that technology to manufacture one car for every ULR purchased. At the end of the quarter, users have to report to the exchange how many cars they produced using that technology. The exchange has the right to audit that number. Once the number is confirmed, two things happen: The exchange will retire that number of ULR out of the account of the owner; and report in aggregate the usage of ULRs (i.e., IPXI will take the numbers reported by Ford, Toyota, etcetera, to get a total number of ULRs consumed in that quarter).

“That is a very important fact because that shows the adoption of technology and therefore will be a key driver for the price for that ULR,” Pannekoek added.

ULR users would anticipate the pricing of the technology, and may overbuy in the beginning when the price is low. If a company or entity bought too many ULRs or cannot sell the cars using that technology, they can sell the excess ULRs in the secondary market – exactly like an emissions trading system, except the latter has a limited supply of carbon credits to achieve an overall goal of reduced emissions.

Under these IPXI rules, there is an unlimited supply of ULRs so the more that are consumed or sold, the greater their value. If users need more, they will be available for purchase.

In the emissions trading market, once carbon is traded and there is a price placed on pollution, companies can decide whether it’s more cost effective for them to buy carbon credits to pollute more, or to change the way they operate so that they pollute less, thereby allowing them to sell their unused credits to another polluter. The idea is that the system will provide incentive to companies to be creative in using new technologies or systems to reduce pollution altogether.

“I believe this will drive R&D decisions at large corporations,” Pannekoek forecasted. Corporations “can see what various technologies are priced at in the market and decide whether to buy or produce…. That is one of the reasons this exchange will spur innovation.”

Other Countries Take Interest

The IPXI has caught the attention of various countries around the world. The European Commission, for example, is interested in determining whether a similar market to what is being developed in the United States would be feasible in Europe. Pannekoek said the Commission has tasked a German company and Swiss university to study the prospect of such an exchange. Pannekoek has been meeting with international intellectual property officials in Europe on the topic.

“Of course it is my hope if the European Commission makes a decision to move forward with this, [that] they’re not going to reinvent the wheel and go with IPXI with this,” Pannekoek said.

Delegations from Korea and China are also looking at the IPXI model to create similar markets in their nations, he added.

Ocean Tomo CEO James Malackowski, who also serves as the chairman of the IPXI, noted that there is a fundamental distinction between the US and other countries. Whereas the US economy is entirely driven by the private sector, it is the governments that propel many economic efforts overseas.

Malackowski said the IPXI’s “wish list” includes three main items:

-That development of these overseas markets is positive “no matter how it happens.”

-Whatever is developed overseas needs to be compatible and consistent with what IPXI has developed in the US.

-If possible, IPXI would like to partner with international markets and help them adopt the IPXI model instead of creating their own exchange.

“There’s a lot of knowledge and thought that have been put into it,” Malackowski said.

The next year of the exchange will be critical, Pannekoek concluded by saying, but, he said, “I think it will very rapidly spread across the world.”