RPX Blog

Study Casts New Light on Possible Impact of Alice Ruling

March 26, 2014

Like many in the patent world, we have been pleased to see the Supreme Court taking a more active role in defining and sharpening interpretation of patent law. This term, the Court is hearing six cases, which we think reflects an encouraging trend toward a more predictable patent system. 
 
One case before the Court, Alice Corp. Pty. Ltd. v. CLS Bank International, has court watchers and patent professionals keenly concerned about how the ruling might (depending on the commentator’s perspective) strengthen or weaken the principles of patent rights.  
 
It’s a somewhat controversial case, so we decided to take a hard look at the heart of the case to determine just how wide-ranging the Court’s ruling could be.
 
The question before the Court in Alice is whether “claims to computer-implemented inventions – including claims to systems and machines, processes, and items of manufacture – are directed to patent-eligible subject matter within the meaning of 35 USC § 101 as interpreted by this Court?” To determine just how many litigations actually turn on this definition, we tasked three RPX experts – two patent attorneys and a patent agent – to analyze a statistically-significant cohort of asserted patents.
 
Specifically, our team assessed claims in 825 patents. The pool comprised 433 randomly selected patents asserted by operating companies in 2012, and 392 randomly selected patents asserted by NPEs in 2012.
 
The results of the study indicate that claims to computer-implemented inventions were common, with 39% of the analyzed patents including at least one claim that should be categorized as such. Further, the study showed that NPEs were more likely than operating companies to assert patents with at least one claim to computer-implemented invention (58% of the NPE sample set vs. 21% of the operating company sample).
 
While conducting the study, our team also assessed whether the claims, like those in Alice, appear to be subject to a petition for covered business methods review, the procedure introduced by the America Invents Act for challenging the validity of certain patents directed to financial products and services. Using this narrower criterion, the experts concluded that three percent of the sample set included at least one claim that could be categorized as a covered business method.  
 
While we think this study offers useful insight into the potential impact of the Court’s upcoming decision, we also remind readers that the study does not address the quality or inherent value of claimed inventions. Our goal was to quantify in general terms the scope of the issue and determine how broadly litigated software patents actually are. As the Court readies its decision in Alice, it is worth remembering that there are many examples of machine-implemented inventions – from MP3 file encoding to public-key cryptography – that would seem to be unique, significant and patent-worthy technological advances. Not all software patents are created equal, and that realization is likely to be reflected in any changes that emerge post-Alice.
 
Readers interested in further discussion of the study findings or in learning more about the methodology we used are invited to view the study here or contact us at whitepaper@rpxcorp.com.

Tags: Patent Assertion, SCOTUS, Software

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Newegg vs. TQP -- “Get Your Money Up Front”

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.

Tags: Market-based Solution, NPE Costs, NPE Inefficiency, Patent Litigation

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NPEs Have Broader Impact Than GAO Headlines Suggest

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.

Tags: America Invents Act, NPE Cost Study, NPE Costs

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