January 6, 2014
As the ongoing Newegg/TQP case now moves to an appeal of the jury verdict in favor of TQP, we have mixed emotions. On the one hand, we empathize with Newegg’s desire to fight what they view as predatory litigation. At the same time we see this case as further proof that litigation is an astonishingly inefficient and illogical way to resolve questions of patent value.
“Illogical” because eight non-expert jurors in Texas ordered a single company to pay $2.3 million for use of a patent that TQP has already licensed to approximately 140 other companies for, on average, about $320,000 each (more than $45 million total). In other words, negotiation created one price; a litigation judgment created another, much higher, price. For those who say NPE lawsuits are like the lottery, here’s proof.
“Inefficient” because to produce these nearly $50 million in payments for the TQP patent, the 140+ licensees/defendants probably spent an additional ~$25-50M in legal fees and TQP has probably spent multiple millions on plaintiff counsel. It’s very likely that more money went to lawyers than to the patent owners – further evidence of just how irrational and wasteful the NPE business model is as a system for exchanging value.
The solution, as we have been saying for five years now, is to move these patent transactions out of the courtroom and into the marketplace. Newegg’s Chief Legal Officer Lee Cheng would doubtless disagree, but the fact is that patents are assets. They have value. Not always high value, but a value, nonetheless. In the Newegg/TQP case, that value was determined by a Texas jury. In the vast majority of NPE assertions – more than 95% of cases settle – the value is determined by legal negotiation between the patent owner and “the user” usually alongside a lawsuit. And because that negotiation is conducted by lawyers in the crucible of litigation, the cost is extraordinarily high and the price paid for the patent is often inflated.
We believe Cheng himself said it best in the aftermath of the verdict. According to Ars Technica’s Joe Mullin, he congratulated the patent inventor Michael Jones and then said, “Get your money up front.”
Cheng was making a glancing comment on Jones’ back-end financial relationship with TQP, the NPE entity that is monetizing the patent on the inventor’s behalf. But the remark was entirely apt and really applies to patent monetization in general. Owners and inventors should be able to get their money early and without strings attached – before partnering with an NPE, before an assertion letter is sent, before a lawsuit is initiated, before a penny is spent on litigation-related transaction costs.
Consider the TQP patent. If Jones had been able to receive a “fair market” price without the frictional costs and years of litigation what would that price be? In a typical monetization agreement, somewhere between 30% and 50% of the settlement amount would go to the owner of the patent, so of the $50 million in payments generated in the campaign, let’s say the owner would receive approximately $25 million (as it happens, we know from public records that the economics of Jones’ deal included an upfront payment and markedly lower back end percentage). It’s important to remember, however, that this kind of monetization demands years of uncertainty and legally-induced stress before payout. Most patent owners would very likely accept far less than $25 million for an early, guaranteed payment.
But even if the TQP patent were worth paying as much as $20 million to the owner (which is very unlikely in our experience), the prorated cost to the 140 licensees would have been about $145,000 each. In retrospect, that would have been a huge bargain compared to how the litigation process played out.
Clearly, sharing the cost and risk of patent monetization would have made sense in the TQP campaign. The defendants would have paid less. The owner would have been (very) fairly compensated. The unnecessary $25+ million in legal transaction costs would have been almost entirely eliminated. And this kind of efficient outcome was entirely possible. All that was needed to make it work was a critical mass of participating companies and a sufficient pool of capital to acquire the TQP patent in the open market.
That very system, of course, is working every day at RPX. We have interceded in the market to clear more than 4,000 patents and avoid thousands of lawsuits over the past five years. As our membership and capital resources continue to grow, the companies in the network can further reduce their litigation risk, while inventors can receive fair market value without the incremental costs of a contingency arrangement. Hopefully the next patent owner with a valuable asset to sell will take the more economically efficient – and financially lucrative – path and get his money “up front”. If so, we look forward to his call.
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September 9, 2013
Quantifiable, accurate data is the key to understanding the true economic impact of NPE litigation, and the US General Accounting Office’s recent data-based analysis of NPE activity is a welcome step toward that goal. Media reports have emphasized one topline conclusion from the report – that NPEs accounted for only 20% of patent litigations from 2007 to 2011 – and some have cited this as evidence that NPE activity is less prevalent than previously believed.
We took a closer look at the data in the GAO study and concluded that NPEs actually represent far more than one-fifth of the patent infringement assertions in the United States. The 20% figure being cited in news reports is based on the number of lawsuits filed, rather than the number of defendants named. While company-versus-company lawsuits are usually bilateral or have just a few defendants, NPE lawsuits – especially in the pre-AIA periods assessed in the GAO report – are typically multi-lateral, often with dozens of named defendants. Consequently, the NPE share of defendants is much higher than the NPE share of cases filed. And because each defendant incurs its own costs, including legal expenses, the number of defendants, not cases, drives the economic impact of NPE assertions.
Further, the GAO’s definition of an NPE did not include individuals, companies that file for patents but do not sell products, research institutions, and operating companies that file suits against other companies that are not competitors – all entities that are traditionally considered NPEs. Inclusion of these entities also results in a much higher NPE share of patent litigation activity.
NPE Share of Patent Infringement Defendants Added
Number of NPE Patent Infringement Defendants Added
For comprehensive NPE activity data including a description of the underlying methodology please refer to RPX’s 2012 NPE Activity Report available for download here
America Invents Act,
NPE Cost Study,
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July 18, 2013
Much of the debate about patent reform – certainly the coverage in the mainstream media – has focused on the economic impact of nuisance litigation: Can legislation or regulation lower risk for operating companies in cases where the cost to fight may far exceed the cost to settle up front? (As we’ve argued in previous blog posts on patent reform, RPX supports government-driven efforts to improve patent quality, but we are skeptical that legislation can change the high costs of the patent licensing market.)
Very little, however, has been written about the economic logic at the other end of the cost spectrum, where “aggregate-and-assert” NPEs amass large portfolios and seek license payments that can run into the high tens or hundreds of millions of dollars. The scale of these license fees makes this a highly strategic risk-management decision for operating companies.
Interestingly, while the inefficiency of the legal system can often make fighting NPEs with small portfolios and small demands (regardless of the merits) seem economically unattractive, the opposite may be true for “aggregate-and-assert” NPEs with large portfolios and eight- or nine-figure demands. Fighting could often be the correct economic choice.
We would argue that the crucial first step in that decision-making process is to determine the nature of the NPE because they fall into two distinct categories: (1) NPEs with coherent, homegrown portfolios; and (2) NPEs that have built portfolios from patents of disparate provenance.
Where portfolios in the first category more likely comprise higher-quality patents, large portfolios of disparate provenance are often purchased from individuals or entities seeking cash for non-core and/or non-strategic assets. There are, of course, exceptions to this rule, and every portfolio is unique on its merits, but based on our analysis of the public data and a great deal of anecdotal evidence, the average cost-per-patent in these “aggregate-and-assert” portfolios is generally quite low.
This fact is clearly visible in a simple fight-versus-settle analysis. Because “aggregate-and-assert” NPEs source their sub-portfolios from the same pool of deals as everyone else does, the cost of fighting these sub-portfolios in court can be quantified by reviewing data from a variety of public sources (and RPX's NPE Cost Study results
). So it is a relatively straightforward task to determine the range of total costs – legal fees plus settlements (or judgments) – that these kinds of portfolios might represent to operating companies.
Number of suits to generate expected present value cost equal to the fees sought by the NPE
Assumes suits are filed all at once (in parallel)
With this in mind, we built an informal model incorporating a variety of factors including the historical average legal costs of fighting a case in court, the typical verdicts (or resolution costs) from NPE cases of various strengths, the chances of success on the merits, and the time value of money. The results are captured in the table below in terms that matter to an operating company deciding whether to (1) pay an “aggregate-and-assert” NPE a substantial high-eight-figure or nine-figure license fee; or (2) incur the costs of fighting the expected litigations generated by that portfolio.
Consider a portfolio with a $200 million price tag for a perpetual license. That amounts to the resolution cost of 370 typical/median litigations (which cost an average of about $600,000 each to resolve). But more importantly, since reaching multiple, individual resolutions with a large NPE may not be an option, that also equals the estimated cost of utilizing the strategy of never settling and paying judgment and ongoing royalty costs (in the case of a loss) of 45 median quality lawsuits. Alternatively, the $200 million price tag is the equivalent of the estimated cost of fighting three all-time most expensive suits to judgment (something historically rare and even rarer for an NPE).
While large NPE portfolios may have higher quality assets than small nuisance-level patents, it seems extremely unlikely that the economic risk of fighting in court would support asking prices in the nine figures. In other words, an argument can be made that the high transaction costs that drive many one-off settlements to the benefit of small NPEs also work to the advantage of potential defendants facing demands for large licensing fees. Is it practical for a larger NPE to initiate the number of litigations needed to win the licenses they are seeking?
It’s food for thought. Obviously one would want to understand other factors like quality, relevance, revenue-at-risk, injunction/exclusion order risk, and executive distraction due to litigation. Nevertheless, an in-house IP team that advises its CEO to take a license today must believe that the portfolio in question is likely to spawn tens or even hundreds of suits of middling quality or that the NPE is capable of identifying, acquiring, and successfully litigating multiple suits of ‘historic’ strength.
At the end of the day, it is about making an economic decision. If a company knows it is going to be facing litigations from a portfolio (large or small) of high-quality assets, it may very well make sense to do the math and pay an appropriate amount to clear that risk sooner than later. But do that math first.
The model supporting this analysis and an explanation of the underlying assumptions are available by contacting us at firstname.lastname@example.org
NPE Cost Study,
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