Data makes the difference (Part 2)

NPE litigations can be viewed as more akin to financial transactions than true disputes over distinct legal issues

Last month, I wrote about the central dynamic of non-practicing entity (NPE) patent suits and how this type of litigation isn’t really designed to determine right or wrong or to remedy legal misconduct. The goal of NPE litigations is simply to generate a transfer of value from the alleged user of an asset to the purported owner of that asset.

In other words, NPE litigations can be viewed as more akin to financial transactions than true disputes over distinct legal issues. And the most effective way to reduce the $11 billion annual cost of those transactions is to get them out of the courtroom and transition them into the business marketplace.

We take this approach at RPX and it demonstrably reduces the risks of NPE assertion. Companies in our network have already avoided or been dismissed from more than 1,500 litigations and avoided more than $1 billion dollars of legal costs. To succeed on a steadily larger scale, this kind of approach will require more participants and, especially, more transparency.

More than 100 companies participated in a survey sponsored by the Coalition for Patent Fairness and administered by RPX. The findings (anonymized and aggregated) have provided invaluable intelligence to help companies targeted by NPEs make smarter, more cost-effective decisions about negotiating posture, settlement or license amounts, whether to acquire patents, and whether to enter (or avoid) litigation.

To understand the pertinence this kind of market data can have for in-house IP teams and risk managers, consider just two quantitative findings from the cost study:

Patent litigation makes up two-thirds of direct NPE costs. Litigation costs (including both the legal expenses and settlements) are the largest portion of the NPE burden, but the data shows that roughly a third of the total costs are not directly related to a court case. Twenty-nine percent of operating company costs are attributable to pre-litigation spending, primarily fees to outside counsel to respond to assertion letters. And an additional 5 percent is due to costs such as patent acquisition, re-exams and prior art searches. Given the proven effectiveness of such efforts, one takeaway from the data is that companies might want to spend more on acquisitions, re-exams, and prior art searches where possible and less on directly defending the litigation.

Except in cases where the total resolution exceeded $10 million, legal defense expenses were generally half or more of the costs. For “nuisance” cases costing less than $100,000 all in, the legal defense costs far outstripped the actual payment to settle the case. Since fully 95 percent of NPE suits ultimately settle, from a purely economic perspective, looking at no other factors, the data would imply that there are efficiencies—especially in less expensive cases—to reaching a settlement quickly or in advance of litigation, and limiting or avoiding legal fees.

Knowing the actual historical costs associated with settling vs. litigating, negotiating with a particular NPE or valuing a particular kind of patent allows risk managers to make informed, data-based decisions. The ability to look at patent risk as a business or market valuation rather than a legal dispute can be worth millions of dollars in avoided costs. Currently, the full findings are available only to participating companies, but top line extracts from the study can be reviewed in “RPX 2012 Cost Study – High-level Findings.”

RPX has begun publishing an NPE Activity Report that details the specific assertion behavior of known NPEs. I’ll discuss this report—and how it can bring further transparency and efficiency to the patent market—in future columns.

Mallun Yen

Mallun Yen is executive vice president of RPX Corporation. She can be reached at infor@rpxcorp.com.

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