From Exposing NPE Myths to Explaining NPE Math

There has long been a dearth of quantifiable, verifiable data in the world of NPE patent litigation.  Most quantitative analysis of NPE activity has essentially been educated guessing.  One of the more valiant efforts to tease something illuminating from the limited public record was undertaken by Michael Risch of the Villanova University School of Law.

Risch’s article “Patent Troll Myths Exposed” in the July/August 2012 issue of Intellectual Asset Management magazine looks at data from nearly 1,000 NPE cases comprising almost 350 patents to reach conclusions about the relative quality of NPE patents, the strength of infringement claims, and the sources of NPE-asserted patents and the capital used to acquire them.  Risch also tests the theory that NPE activity is actually a catalyst for innovation and investment in new ideas and start-ups.

It makes for interesting and thought-provoking reading.  We applaud Risch’s focus on data-driven results and we agree with many of his conclusions, especially his belief that individual inventors need a viable way to monetize their intellectual property assets.

At the same time, Risch’s article underscores the fact that even his relatively detailed look at the available data can’t cast any appreciable light on the most important aspect of the NPE business model: cost.  His data set is 971 litigations, only 43 of which progressed to a merits ruling.  In other words, 95% of the cases settled.  This is typical, and it is why quantifying the true cost of the NPE business model is so difficult.

While the awards in those 5% of cases are a matter of public record, the settlements in the other 95% generally are not.  Companies also don’t disclose their litigation defense fees; or the legal costs and license payments resulting from patent assertions that never go to trial; or the costs associated with product delays and other operating distractions associated with fighting an infringement.  These are hidden costs and there has never been a source of data that Risch or any other analyst could use to determine exactly how much operating companies are spending to fight and/or settle NPE suits.

But the data landscape has changed.  As we described in our previous blog post, the Coalition for Patent Fairness has sponsored a comprehensive NPE Cost Study, which RPX is administering.  Company participation has been broad and we have collected thousands of anonymized data points on the cost and dynamics of NPE litigation.

As Risch notes in his article, almost everything the industry “knows” about NPE behavior is based on hearsay, anecdotal evidence or presumption.  This is unacceptable, given the size of the patent market and the financial impact on operating companies, patent users and the creators of intellectual property.  Only accurate, reliable information can create the price efficiency necessary for rational exchanges of value.

In short, market participants need facts to make informed decisions.  The Cost Study is producing those facts, and given the strong support we have seen from operating companies, we expect participation in the Study to grow and the database of NPE cost information to steadily expand over time.

More on the Study and RPX’s findings in upcoming posts.