At RPX we talk a lot about the need for “market efficiency” in the patent world—about the need for a more cost-effective way to transfer value between patent users and patent owners. Today, litigation is the default method to do so, and it is hard to imagine a less efficient form of economic exchange or price discovery than a lawsuit.
In fact, of the nearly $11 billion spent by operating companies to resolve non-practicing entity (NPE) patent disputes last year, approximately half went to settlements and half to legal costs. In other words, if settlements in theory represent the agreed-upon value of the asset, then the legal expenses represent the transaction costs. This is inefficiency on a massive scale; no economically rational market would ever survive with such large transaction costs.
Now, some might say that settling an infringement suit is not an economically rational act. However, more than 95 percent of NPE cases settle. The users of the patents are paying the owners. So why not make that payment in a more efficient, market-based way that actually reflects the value of the patent rather than hold-up costs of litigation?
One major reason this hasn’t happened historically is the uniquely opaque nature of litigation and settlements. Lawsuits are contentious; secrecy is a competitive advantage and there is little or no sharing of information. In a market, of course, just the opposite is true. Market transactions are mutually beneficial and participants are incented to share information that creates price transparency. Truly open, friction-free patent markets that allow the buyer or licensee to ascertain the real value of the patent require widely available, trusted transaction data.
And when such information is widely available, markets become even more efficient because participants are able to establish the common metrics that optimally determine valuations. For example, today buyers and sellers of residential real estate use the Multiple Listing Service (MLS), a centralized repository of key property attributes—square footage, number of rooms, size of lot, property taxes, and more—for every asset on the market. As a result, pricing is based on objective data and comparisons are always pertinent. Unlike a litigation settlement, in a property transaction there is no bluffing and very little guesswork. And the transaction costs are kept to minimum by the transparency of the pricing negotiations and the well-established system of brokers and other intermediaries. Freely shared data creates efficiency.
We believe this kind of openness and these kinds of commonly accepted metrics can be adopted in the patent market as well. The NPE Cost Study that RPX administered last year was a good start. For the first time, nearly 100 companies (anonymously and securely) shared information about litigation costs, patent costs and settlements, as well as data on technology area, negotiating history and other factors that can be used to determine asset valuations.