High Patent Defense Cost
The NPE business model creates inevitable cost inefficiencies for operating companies. At minimum, each assertion requires a discovery process and legal response to the plaintiff's letter. Even if the assertion is without foundation or the patent in question is invalid or not applicable, the operating company faces unavoidable near-term costs and significant potential long-term costs. In fact, many NPE assertions are designed simply to realize the “nuisance value” – a payment reflecting the operating company's cost savings from avoiding a formal litigation.
Most NPE cases follow a sale of patent assets at a price significantly lower than the expected litigation outcome. Companies have few mechanisms to participate in the purchase market and share the costs of acquisition.
Once asserted against, operating companies defend themselves unilaterally, typically with a limited budget. They have limited means to efficiently share defense costs and apportion the risk among themselves. Moreover, companies have no way of sharing the costs of participating in the purchase market. Most cases result from a sale of patent assets at a price more greatly reduced than the expected litigation outcome.
Outside counsel is expensive, especially as litigations are often filed in jurisdictions far from the defendant's home city or state. Data from the American Intellectual Property Law Association (AIPLA) Economic Survey 2009 shows an upward trend in legal expenses associated with responding to and defending against patent assertion.
For a single defendant in a case with only one patent at issue, legal costs through discovery alone averaged $1.8 million in 2009, up from $1.6 million in 2007. Total costs for such cases (including all outside counsel, paralegals, travel, analytics, expert witnesses, etc.) averaged nearly 20% higher in 2009 than in 2007. Once assertion escalates to litigation, those costs – excluding a settlement or adverse judgment – can easily exceed $3 million per trial, with legal and administrative costs increasing with the size of the asserted damages.