Prying Open the “Black Box” of NPE Costs
June 26, 2012
NPE litigation has been a growing cost burden for tech-based operating companies over the past decade. Just how large that burden actually is, however, has been a huge question mark.
Judgments are a matter of public record, but fewer than 5% of NPE cases ever go that far, so the vast majority of NPE-related costs – litigation defense fees and settlements, as well as legal costs and license payments resulting from assertions that don’t go to trial – are hidden. Add in corollary costs, such as product delays and management distraction, and it quickly becomes clear that the fiscal consequences of the NPE business model have been not only unknown, but unknowable. These just aren’t expenses that companies routinely track, let alone disclose.
In the wake of the America Invents Act, Congress has made it a priority to better understand the financial impact of NPEs on the patent system, and as a result the Coalition for Patent Fairness has sponsored a comprehensive survey designed to open this black box of NPE-related costs. RPX has been administering the process, which included NPE costs data from more than 80 companies ranging from small start-ups to large public corporations. We have compiled thousands of anonymized data points and a much clearer picture of the nature and the scale of NPE-related costs is starting to take shape.
Because we are still compiling data and expanding the number of participating companies, we at RPX have not yet come to any specific conclusions (our analysis and detailed review of the data will eventually be shared with all participants). This week, however, some high-level findings and conclusions are being published by two academic partners connected to the study: Professors Jim Bessen and Michael Meurer of Boston University.
Among the highlights of the report is the professors’ conclusion that the direct accrued costs to operating companies for responding to NPE activity in 2011 totaled approximately $29 billion (which includes the cost of non-litigated assertions, but not indirect costs such as product delays or loss of market share). The professors also note that small and medium-sized businesses are bearing an inordinate share of the NPE burden. By revenue size, 82% of all defendants had revenues below $100 million. The report also concludes that the activities of NPEs have not promoted invention overall.
RPX did not have any input on the paper nor do we necessarily endorse the conclusions or recommendations made by the authors. We do welcome the paper as a valuable contribution to the growing public discussion about NPEs and the dynamics of the patent market. As the survey administrator, we have access to an even broader data set than the two academic participants and we will be publishing a broader view of the data along with our own analysis for participating companies.
Indeed, the survey provides data-based confirmation of some of the facts about NPE patent litigation that we have been discussing with clients for years. For example, in the majority of NPE assertions almost half the cost to operating companies is legal cost. There is also clear evidence that certain industries face markedly more expense to deal with NPEs than other industries, though the cost to resolve “nuisance” suits is actually very similar across all sectors. The fact is that some industries – such as semiconductors – simply have a higher number of more sophisticated, long-lasting litigations that often have costly settlements.
It is likely that the paper published this week will be used by the Government Accountability Office, which is producing a report for Congress. At RPX, we look forward to taking the survey process to its conclusion and generating a more detailed assessment of the findings. And we expect this new insight into the black box of NPE costs will make RPX’s approach to reducing patent risk even more effective and efficient.
Whatever steps the lawmakers in Washington ultimately take, the data clearly shows that the scale and breadth of the operating and financial risk for operating companies is clearly large and growing. The need for a transparent, market-based solution to mitigate that risk has never been more compelling.