RPX CORP
`
`FORM 10-K
`
`(Annual Report)
`
`Filed 03/11/13 for the Period Ending 12/31/12
`
`
`Address ONE MARKET PLAZA
`STEUART TOWER, SUITE 700
`SAN FRANCISCO, CA 94105
`866-779-7641
`Telephone
`0001509432
`CIK
`Symbol RPXC
`SIC Code
`6794 - Patent Owners and Lessors
`Industry Misc. Financial Services
`Sector
`Financial
`Fiscal Year
`12/31
`
`http://www.edgar-online.com
`© Copyright 2013, EDGAR Online, Inc. All Rights Reserved.
`Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.
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`VIRNETX EXHIBIT 2007
`RPX v.VirnetX
`Trial IPR 2014-00173
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`UNITED STATES
`SECURITIES AND EXCHANGE COMMISSION
`Washington, D.C. 20549
`————————————————
`FORM 10-K
`————————————————
` ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
`OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012
`
`OR
` TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
`ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
`Commission File Number: 001-35146
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`RPX Corporation
`(Exact Name of Registrant as Specified in Its Charter)
`————————————————
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`Delaware
`(State or Other Jurisdiction of
`Incorporation or Organization)
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`26-2990113
`(I.R.S. Employer
`Identification No.)
`
`ONE MARKET PLAZA SUITE 800
`SAN FRANCISCO, CALIFORNIA 94105
`(Address of Principal Executive Offices and Zip Code)
`Registrant’s Telephone Number, Including Area Code: (866) 779-7641
`————————————————
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`Securities Registered Pursuant to Section 12(b) of the Act:
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`Name of Each Exchange on Which Registered
`Title of Each Class
`Common Stock, $0.0001 Par Value
`The NASDAQ Stock Market LLC
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`Securities Registered Pursuant to Section 12(g) of the Act:
`None
`————————————————
`Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES  NO (cid:4)
`Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES  NO (cid:4)
`Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
`the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
`the past 90 days. YES (cid:4) NO 
`Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be
`submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
`registrant was required to submit and post such files). YES (cid:4) NO 
`Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
`be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
`amendment to this Form 10-K. 
`Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
`definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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` Accelerated filer
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`Large accelerated filer
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`  (Do not check if a smaller reporting company)
` Smaller reporting company
`Non-accelerated filer
`Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES  NO (cid:4)
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`The aggregate market value of the common stock held by non-affiliates of the registrant was $337.1 million as of June 30, 2012, which is the last business day of
`the registrant’s most recently completed second fiscal quarter, based upon the closing sale price on The NASDAQ Global Select Market reported for such date.
`Shares of common stock held by each officer and director and by each person that owned 5 percent or more of the Registrant ’ s outstanding Common Stock
`were excluded due to the fact that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination
`for other purposes.
`There were 51,464,676 shares of the registrant’s common stock issued and outstanding as of February 28, 2013.
`
`Documents Incorporated by Reference:
`Portions of the Definitive Proxy Statement for registrant’s Annual Meeting of Stockholders (the “Proxy Statement”), are incorporated by reference in Part III of
`this Form 10-K to the extent stated herein. The Proxy Statement will be filed within 120 days of the registrant’s fiscal year ended December 31, 2012 .
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`TABLE OF CONTENTS
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`Table of Contents
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`PART I
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`Business
`Item 1.
`Item 1A. Risk Factors
`Item 1B. Unresolved Staff Comments
`Item 2.
`Properties
`Item 3.
`Legal Proceedings
`Item 4.
`Mine Safety Disclosures
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`PART II
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`Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
`Item 5.
`Selected Consolidated Financial Data
`Item 6.
`Management’s Discussion and Analysis of Financial Condition and Results of Operations
`Item 7.
`Item 7A. Quantitative and Qualitative Disclosures about Market Risk
`Item 8.
`Consolidated Financial Statements and Supplementary Data
`Item 9.
`Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
`Item 9A. Controls and Procedures
`Item 9B. Other Information
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`PART III
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`Item 10. Directors, Executive Officers and Corporate Governance
`Item 11.
`Executive Compensation
`Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
`Item 12.
`Item 13.
`Certain Relationships and Related Transactions, and Director Independence
`Item 14.
`Principal Accounting Fees and Services
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`PART IV
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`Exhibits and Consolidated Financial Statement Schedules
`SIGNATURES
`EXHIBITS
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`Item 15.
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`Item 1. Business
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`PART I.
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`FORWARD-LOOKING INFORMATION
`This Annual Report on Form 10-K contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions
`which, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-
`looking statements. The statements contained in this Annual Report on Form 10-K that are not purely historical are forward-looking statements
`within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Forward-looking statements
`are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,”
`“intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to
`identify forward-looking statements. Forward-looking statements include statements regarding our business strategies and business model,
`products, and benefits to our clients. These statements are based on the beliefs and assumptions of our management based on information
`currently available. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual
`results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors
`that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled
`“Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K.
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`Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no
`obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
`
`
`Overview
`RPX Corporation (together with its subsidiaries, “RPX”, “the Company”, “our”, “we” or “us”) was incorporated on July 15, 2008 in the
`state of Delaware. We help companies reduce patent-related risk and expense. Products and services in today’s economy increasingly
`incorporate innovative and complex technologies that are subject to a growing number of issued patents. As a result of this technology and
`patent proliferation, companies of all sizes can face significant challenges managing the risks and expenses arising from claims that their
`products and services infringe on patents owned by others.
`
`We believe the process by which value is transferred from users to owners of patents lacks key attributes of more developed markets, such
`as an open exchange to execute transactions, transparent pricing information and broadly accepted standard contract terms. Because an orderly
`and efficient market for the exchange of patent value has yet to develop, this transfer of value is currently driven by litigation or the threat of
`litigation. Patent litigation today is a multi-billion dollar industry.
`
`Our patent risk management solution facilitates more efficient exchanges of value between owners and users of patents compared to
`transactions driven by actual or threatened litigation. The core of our solution is defensive patent aggregation, in which we acquire patents and
`licenses to patents that are being or may be asserted against our current and prospective clients. We then license these patent assets to our clients
`to protect them from potential patent infringement assertions. We believe our solution allows clients to mitigate patent risk at a lower cost than
`they would be able to achieve through other approaches. We also provide our clients with access to our proprietary patent market intelligence
`and data. We refer to patents, licenses to patents and acquired covenants not to sue specific companies collectively as “patent assets.”
`
`Our solution offers the following benefits to our clients:
`• Reduced Risk of Patent Litigation – Clients reduce their exposure to patent litigation because we continuously assess patent assets
`available for sale and acquire many that are being or may be asserted against our clients or potential clients. Our clients have no
`litigation risk related to the patent assets that we own.
`• Cost-Effective Licenses – Our annual subscription fee is typically based on a client’s historical financial results. Accordingly, our
`subscription fee is predictable for our clients. We believe our approach to pricing is different than the pricing strategies of traditional
`patent licensing businesses, which generally negotiate license fees based on the perceived relevance of their various patent portfolios
`to each licensee. We believe our approach to pricing also provides clients with non-exclusive license rights to our large and growing
`portfolio of patent assets at a lower cost than they would have paid if these patent assets were owned by other entities.
`• Reduced Patent Risk Management Costs – Clients can reduce their ongoing patent risk management costs by supplementing their
`internal resources with our database of information and extensive transaction experience relating to the patent market. We actively
`monitor the patent market to understand the availability of patent assets for sale or license, the identity of the owners and licensors of
`these assets, the terms by which they may be available and the technologies to which these assets apply. We also track relevant
`litigation activity and identify key participants and trends in the patent
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`market. As part of their subscription, our clients have access to this information through our proprietary web portal and through
`discussions with our client relations team.
`
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`In 2012, we started to offer NPE Patent Infringement Liability Insurance, which is a liability insurance policy for US-based operating
`companies that covers certain costs associated with patent infringement lawsuits by non-practicing entities (“NPEs”). The insurance product
`complements our core defensive patent acquisition service, enabling policyholders, who must be members of our client network, to better
`manage the risk of NPE patent litigation.
`
`The Market
`The United States Constitution empowers Congress “to promote the progress of science and the useful arts by securing for limited times
`to authors and inventors the exclusive right to their respective writings and discoveries” through the grant of patents. Patent rights are a key
`component of a knowledge-based economy and are assets that can be bought, sold or licensed. We refer to the market in which participants
`exchange value related to patents as the “patent market.”
`
`Patent litigation risk plagues operating companies of all sizes and has the potential to significantly disrupt business activities and distract
`from normal business operations. Both large and small companies can be affected by major verdicts or high settlement costs. Smaller companies
`may also find that the expense associated with defending against a patent assertion can have a significant adverse financial impact. We believe
`the extensive use of litigation and the threat of litigation prevents efficient transactions between the principal participants in the market: patent
`owners and operating companies.
`
`Monetization of Patents
`Historically, the following fundamental attributes of patents have enabled patent monetization:
`• Patents Provide a Limited Monopoly – In exchange for public disclosure of an invention, a patent owner is granted a monopoly over
`the use of a patented invention for a specified period, typically 20 years. Patent rights are negative rights, meaning that they generally
`enable a patent owner to exclude others from commercial exploitation of a patented invention, regardless of whether the patent owner
`has the resources to manufacture or commercialize the invention.
`• Patents Confer Negative Rights – As the owner of a negative right, a patent owner has recourse through litigation to prevent others
`from using, making or selling the patented invention. Even when the patented invention is only a component of a broader product or
`service, the negative right can be enforced against any product or service that incorporates the component.
`• Patents May Be Licensed – A patent owner can authorize use of the patented invention by one or more parties, typically in exchange
`for licensing fees.
`• Patents Are Assets That Can Be Transferred – A patent can be sold, in which case the negative right and monopoly associated with
`the patented invention are transferred to the buyer. When a patent is sold, the buyer’s negative rights are constrained by licenses
`granted by previous owners.
`
`•
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`More recently, several developments have increased opportunities for patent monetization and created an environment that is more
`favorable to investing in patents for the purpose of generating financial returns. These developments include:
`•
`Improved Search Capabilities – The entire database of United States patents is now searchable on the Internet, enabling patent
`investors to quickly identify patents and their owners. The Internet also makes it much easier for patent owners to identify and
`research products and services that may relate to their patents.
`Increasing Rate of Issuance of Technology Patents – Patents issued with class code identifiers that we classify as technology-related
`patents have more than doubled in the past 10 years.
`• Overlap of Technology Patents – Because inventors can patent incremental improvements to existing inventions, multiple patents can
`apply to individual components of a product or service. Consequently, multiple patent owners may seek to extract license fees related
`to a single product or service. One example of this overlap of patents is semiconductor technology known as DRAM. Today, there are
`several thousand issued United States patents with “DRAM” specifically listed as a claim element. These DRAM patents span design,
`fabrication, testing and component technology including dies, capacitors, memory cells, transistors, integrated circuits, substrates and
`packaging. Each of those aspects may be covered by multiple patents that could be infringed by a DRAM semiconductor device or
`downstream product. Potential infringement of these patents could occur by anyone who makes, uses or sells a product using this
`technology.
`• Technology Convergence – Modern products and services incorporate numerous technology components. The evolution of mobile
`devices provides an example. This growth can be attributed to the expanded set of features and functionality incorporated in today’s
`smartphones, including touchscreens, Internet access, streaming video, media playback, application store readiness and other web-
`based services, and WiFi connectivity options.
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`• More Companies Employing Patented Technologies – A growing number of companies, including non-technology companies, make,
`use and sell products or services that utilize patented inventions. For example, consumer banks now offer online bill pay as a standard
`feature, which relies on complex technologies that may be subject to many patents.
`• Specialized Appellate Court for Patent Cases – The United States Court of Appeals for the Federal Circuit was created in 1982 to
`serve as the central appellate venue for patent-related cases. We believe this centralization of patent-related appeals has resulted in a
`more uniform application of patent law. In addition, various federal district courts have adopted patent-specific rules of procedure to
`facilitate patent litigation. These factors have created a more attractive environment for patent assertions.
`
`All of these developments have caused significant capital to flow to companies specifically formed to acquire and monetize patent assets.
`
`Emergence and Growth of NPEs
`NPEs, do not create or sell products or services, but instead exist to monetize patents through licensing and litigation. Some NPEs obtain
`patents through their own research and development efforts, while others accumulate patents through acquisitions. NPEs have become a major
`factor in the patent market and an important source of liquidity for patent owners.
`
`Operating companies can incur significant costs to defend themselves against patent assertions by NPEs. At a minimum, companies faced
`with an assertion typically respond to the assertion letter and evaluate the patents being asserted. If the assertion proceeds to trial, costs grow
`substantially. NPEs generally do not create or sell their own products or services and therefore are not susceptible to counter assertion, a
`common defensive strategy in patent disputes between operating companies.
`
`We believe that the amount of capital raised by NPEs is currently in the billions of dollars. Some of the large awards and settlements
`received by NPEs have resulted in extensive media coverage, contributing to a significant influx of capital into the patent market. To date we
`have identified in excess of 1,000 unique NPE plaintiffs that have been active since 2005. In addition, many individual inventors and universities
`are also using litigation to monetize patents.
`
`Our Solution and Benefits to Our Clients
`We have pioneered an approach to help operating companies mitigate and manage patent risk and expense by serving as an intermediary
`through which they can participate more efficiently in the patent market. Operating companies that join our network pay an annual subscription
`fee and gain access to our patent risk management solution. The subscription fee is typically based on a fee schedule that is tied to a client’s
`revenue or operating income and remains in place over the life of a membership, with adjustments limited to Consumer Price Index increases.
`By offering a fee schedule that does not change based on our patent asset acquisitions, we divorce the amount of fees charged from the value of
`our patent assets. We believe our pricing structure creates an alignment of interests with our clients, allowing us to be a trusted intermediary for
`operating companies in the patent market.
`
`
`Defensive Patent Aggregation
`The core of our solution is defensive patent aggregation, in which we acquire patent assets that are being or may be asserted against our
`current and prospective clients. We then license these assets to our clients to protect them from potential patent infringement assertions. We
`acquire patent assets from multiple parties, including operating companies, individual inventors, NPEs and bankruptcy trustees. We also acquire
`patent assets in different contexts, including when they are made available for sale or license by their owners or to resolve threatened or pending
`litigation against our clients or prospective clients.
`
`We have not asserted and will not assert our patents. We have never initiated patent infringement litigation, and our clients receive
`guarantees that we will never assert patents against them. We consider this guarantee to be of paramount importance in establishing trust with
`our clients. In addition, because we have minimal risk from infringement claims, we are able to engage in more transparent discussions regarding
`the value of patent assets with patent owners. Our ability to engage in transparent discussions with both operating companies and patent owners
`allows us to act as an effective intermediary between participants in the patent market. As a result, we provide a conduit through which value can
`flow between market participants at lower transaction costs than is typically the case when patents are monetized through litigation or the threat
`of litigation.
`
`As a part of our solution, we provide extensive patent market intelligence and data to our clients. Clients can access this market
`intelligence and data through our proprietary web portal and through discussions with our client relations team. This market intelligence and data
`helps our clients better understand past and potential patent acquisition transactions, relevant litigation activity and key participants and trends in
`the patent market.
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`Benefits to Our Clients
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`In general, operating companies join our network to reduce their risk of patent litigation and the expected costs associated with patent risk
`management. In exchange for an annual subscription fee, which in some instances has been less than the costs associated with a single patent
`assertion, our clients gain access to the following benefits:
`• Reduced Risk of Patent Litigation – Clients reduce their exposure to patent litigation because we continuously assess patent assets
`available for sale and acquire many that are being or may be asserted against our clients or potential clients. Our clients have no
`litigation risk related to the patent assets that we own.
`• Cost-Effective Licenses – Our annual subscription fee is typically based on a client’s historical financial results. We believe our
`approach is different than the pricing strategies of traditional patent licensing businesses, which generally negotiate license fees based
`on the perceived relevance of their various patent portfolios to each licensee. We believe our approach to pricing also provides clients
`with non-exclusive license rights to our large and growing portfolio of patent assets at a lower cost than they would have paid if these
`patent assets were owned by other entities.
`• Reduced Patent Risk Management Costs – Clients can reduce their ongoing patent risk management costs by supplementing their
`internal resources with our database of information and extensive transaction experience relating to the patent market. We actively
`monitor the patent market to understand the availability of patent assets for sale or license, the identity of the owners and licensors of
`these assets, the terms by which they may be available and the technologies to which these assets apply. We also track relevant
`litigation activity and identify key participants and trends in the patent market. As part of their subscription, our clients have access to
`this information through our proprietary web portal and through discussions with our client relations team.
`
`
`Our Strategy
`Our mission is to transform the patent market by establishing RPX as the essential intermediary between patent owners and operating
`companies. Our strategy includes the following:
`• Growing Our Client Network – We intend to grow our client network by continuing to develop relationships with companies that
`have experienced NPE-initiated patent litigation and continuing to demonstrate the value of our patent risk management solution.
`• Acquiring Additional Patent Assets – We intend to continue to acquire patent assets that are being or may be asserted against current
`and prospective clients and to increase our role and expertise in the patent market. We believe our disciplined approach to valuing
`and acquiring patent assets will allow us to continue to deploy our capital in an efficient and effective manner to maximize the patent
`risk management benefits to our clients.
`• Focusing on Client Relations – We intend to continue to support our client relations team to ensure we deliver the highest levels of
`service and support to our clients, which we expect will drive client satisfaction and assist in our efforts to build trusting relationships
`with and retain clients as their subscription agreements come up for renewal.
`• Developing Proprietary Technology Solutions for Our Clients – We intend to continue to enhance our proprietary web portal to
`provide our clients with the most current intelligence and data on patent acquisition opportunities, relevant litigation activity and key
`market participants and trends that affect their patent risk exposure.
`• Offering NPE Insurance – We offer and have written insurance policies for clients interested in additional management of their
`exposure to patent infringement claims brought by NPEs. We have concentrated our sales efforts on small and medium enterprises
`and we require that policyholders also subscribe to our core defensive patent acquisition service.
`• Providing Complementary Solutions – We believe we can generate additional sources of revenue by offering complementary
`solutions that further mitigate patent risks and expenses for operating companies, including the facilitation of joint defense
`agreements and cross-licensing arrangements. A joint defense agreement is an agreement among multiple defendants in a lawsuit to
`appoint one legal counsel or group of legal counsel to represent multiple defendants. A cross-licensing arrangement is an agreement
`among two or more parties to license some or all of their patent portfolios to each other.
`• Enhancing Our Capabilities Through Acquisitions – We occasionally evaluate the potential acquisition of businesses and
`technologies that can enhance our capabilities and our patent risk management solution.
`
`
`Our Client Network
`We have built a network of clients that includes some of the world’s most prominent technology companies, as well as many smaller and
`emerging companies. Our client network has grown rapidly since our inception. As of December 31, 2012 , we had 140 clients.
`
`We believe our patent risk management solution is broadly applicable to companies that design, make or sell technology-based products
`and services as well as to companies that use technology in their businesses. Our clients are active in a broad range of industries including
`consumer electronics, personal computers, e-commerce, financial services, software, media content and distribution, mobile communications and
`handsets, networking and semiconductors.
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`New Client Acquisitions
`Our membership team identifies potential clients by prioritizing operating companies that have been subject to patent infringement claims
`initiated by NPEs. The membership team is responsible for educating potential clients on the benefits of our solution and explaining how our
`solution mitigates patent risk and expense. After we have communicated our business model to a prospective client, we invest considerable
`resources learning about the company’s business, providing information about the patent market and developing a relationship of trust with the
`executives responsible for patent-related matters. We also proactively monitor litigation activity related to each of our clients and certain
`prospective clients to help us direct our patent asset acquisition and membership sales efforts. In addition, we conduct a variety of marketing
`efforts to establish ourselves as a leading source of information in the patent market, including industry conferences and seminars, public
`relations and industry research.
`
`Client Retention and Client Relations
`After a company has become a client, the maintenance of the relationship is handled by our client relations team. One of the primary
`responsibilities of our client relations team is to maintain frequent dialogue with senior executives of our clients so we can better understand
`their patent risk profiles. Our continued success and our ability to retain clients depend on our ability to demonstrate that our patent risk
`management solution enables clients to avoid costs that, in aggregate, exceed their subscription fees. We refer to this concept as return on
`investment, or ROI.
`
`Our client relations team also provides clients with patent market intelligence, updates on our patent asset acquisitions and assessments of
`the ROI delivered over the term of their memberships. We provide this information through direct discussions with our clients and also share
`information with them through our proprietary web portal. We believe our frequent interactions allow us to optimize our patent asset acquisition
`decisions, which lead to a more compelling ROI for our clients, thus supporting our client retention efforts.
`
`Patent Asset Portfolio and Patent Asset Acquisition
`We acquire patent assets that are being or may be asserted against current or prospective clients. As of December 31, 2012 , we had
`deployed over $620 million of our capital and the capital of our clients to acquire patent assets. Of this amount, deployment of our capital totaled
`approximately $400 million. Since inception, approximately two-thirds of our acquisition capital has been deployed for the purchase of patent
`rights and the balance deployed for the purchase of patents. Acquisitions of patent rights generally benefit only those operating companies
`which are clients at the time of the acquisition, whereas acquisitions of patents benefit both current and future clients. As of December 31,
`2012 , approximately 25% of our patent assets, based upon acquisition price, had been acquired from brokers or other entities seeking to sell
`patent assets, while the balance was acquired out of litigation. The Company’s patent asset acquisition efforts have been broadly diversified
`across the following market sectors: consumer electronics, personal computers, e-commerce, financial services, software, media content and
`distribution, mobile communications and handsets, networking and semiconductors.
`
`The substantial majority of our 120 acquisitions through December 31, 2012 involved patent assets that we believed were relevant to
`multiple clients and/or prospective clients and were funded with our own capital resources. We occasionally identify patent assets that cost more
`than we are prepared to spend of our own capital resources or that may be relevant only to a very small number of clients.