The Power of Preemptive Patent Buying

RPX was founded on the principle of efficient markets, and we have always believed that it is far more cost-effective to transfer patent value between users and owners through a transparent, collaborative, open market rather than litigation. Some recent analysis—supported by data published in our inaugural RPX 2014 Patent Marketplace Report—quantified just how true this is.

We began the exercise by looking anew at the more than 4,000 patent portfolios we have reviewed but did not acquire since starting RPX in late 2008.  (RPX has spent more than $800 million on patents over the past 5½ years, but since it is impossible to buy every available asset on the market we have always deployed our capital where we and our members have seen the greatest risk at the time.)

We identified approximately 200 of those non-purchased portfolios that ultimately were acquired by NPEs and then asserted in monetization campaigns. Our goal in doing so was simple: we wanted to determine the difference between what portfolios cost as open-market assets (the price paid to acquire the portfolio from the original seller) and what they cost as litigated assets (the amount spent by operating companies to defend and settle the suits).

RPX is the only entity able to provide this analysis because only RPX has compiled proprietary cost and settlement data from more than 2,500 NPE litigations. The breadth and depth of that data—covering a wide array of NPE litigations—allows us to make informed estimates of the total costs of any actual or potential NPE litigation.

We are also uniquely well equipped to estimate the likely selling price of even the portfolios that we did not acquire, since RPX analyzes the majority of portfolios that come up for sale. We know sellers’ original asking prices and after conducting hundreds of transactions can readily gauge the open market value for a broad range of patent types.

With this data-driven insight we calculated that the 200 litigated portfolios that we passed on over the past 5½ years were likely acquired by NPEs for around $400 million.

As you can see in figure 1, those same 200 portfolios ended up being used offensively in just over 1,000 litigations for RPX members—representing over a third of their NPE litigation volume—and costing an estimated $1.7 billion in legal costs and settlements (we focused our analysis only the RPX network; the overall cost to industry would obviously have been even higher).

The power of preemptive buying couldn’t be clearer. In this broad-based, multi-year example the difference between the open market price and the litigation-model price is $1.3 billion. RPX’s acquisition activity has already helped our members avoid thousands of litigations and saved them at least $1.5 billion over the past 5½ years. As figure 2 shows, an additional $405 million in targeted open-market buying (just $75 million per year) could have cleared another $1.7 billion in additional litigation cost. And buying just the portfolios priced at $1 million or less—134 of the 200—would have avoided more than $550 million in costs for only $11 million per year.

The operative word here, of course, is “targeted.” It would have taken perfect foresight to identify precisely the 200 riskiest portfolios out of the thousands we reviewed. That said, as our experience and data resources continue to grow, RPX is increasingly effective at targeting portfolios with the highest likelihood of becoming high-cost legal problems for operating companies.

Moreover, given the extraordinarily large difference between the open market price and litigated cost of a portfolio, there is quite a bit of room to overspend on portfolios that might turn out to be “duds” while still dramatically reducing the overall cost to industry of patent risk.

RPX is attempting to reach the necessary size to implement preemptive buying on such a scale, and progressively more NPE risk has been cleared every year since defensive buying began in 2008. The key takeaway is that the open market is quantifiably the most effective and efficient forum in which to transfer patent value, and it is here where companies affected by NPE litigation should consider expanding their risk-mitigation resources.

*Based on our experience in the open market, the RPX 2014 Patent Marketplace Report provides summary statistics from a variety of patent market metrics, offering comprehensive and relevant information to all IP professionals. To learn more, contact reports@rpxcorp.com