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.