RPX Data Update: Patent Litigation Volatility Persists as Strategies Shift

At RPX we know well that significant events—whether judicial, legislative, economic, or technological—shape patent litigation and market activity more than the mere passage of time. But the turn of a new year is a good moment to take a pulse. Below we provide updated metrics and analysis for patent litigation volume, transactions, and other indicators that shed light on the state of the patent ecosystem.

Litigation Volume: NPEs Seek Easy Targets

NPEs added about 2,800 defendants and started nearly 300 new campaigns in 2016 (Figure 1). This continues a trend of volatility that began in 2010 with volume ebbing and flowing in alternating years since then—explained in part by events such as the passage of the America Invents Act (impacting 2011) and a change in pleading standards that took effect in late 2015. Litigation activity by operating companies remained consistent.

We see, as well, that NPE activity settled down a bit, partially due to the impact of Patent Trial and Appeal Board (PTAB) challenges and the Supreme Court’ s 2014 Alice decision. As we noted earlier this year, Alice has not been prolific—only about 4% of all patents asserted since mid-2014 had appeared in an Alice decision. Its impact will likely remain focused primarily on financial and business method patents (22% affected) or software patents (16% affected). But among those patents affected, Alice challenges have been largely successful.

NPEs continue to find and target companies never before sued by an NPE for patent infringement. These “first-time defendants” steadily accounted for 50-60% of the 2,000 to 3,000 unique defendants sued by NPEs in each of the past few years, even in periods of decline (Figure 3). In theory, it is easier to extract quick and lucrative settlements from inexperienced defendants because many lack the resources necessary for a long, costly battle. Hence, new defendants remain prime targets for NPEs.

Likewise, about two-thirds of unique NPE targets in 2016 were companies with revenues that are reported or assumed to be below $100 million. These companies each consistently see one or two NPE campaigns per year, on average. NPEs know many of these companies cannot afford even one expensive fight. While litigation was down across the board, the decline was more pronounced for the largest defendants—with the benefit for lower-revenue companies more tempered. This suggests that NPEs may be shifting focus away from seasoned defendants, and toward more vulnerable targets.

Forum Changes on the Horizon

The Eastern District of Texas continues to be the US venue of choice for NPE plaintiffs by an extraordinary margin. In December, though, the Supreme Court agreed to hear TC Heartland v. Kraft Foods, a matter that could keep patent cases out of venues where the defendant has little corporate presence—which, for many, includes the Eastern District of Texas.

This notoriously plaintiff-friendly venue has only become more popular among NPEs in the last two years, as Alice and IPR petitions have changed the odds nationwide in favor of defendants. By contrast, operating companies slightly favor districts that are popular for corporate headquarters—California for high tech, Delaware in general, and New Jersey for pharmaceuticals—and distribute their overall litigation much more evenly.

In the short term, the pending TC Heartland petition might drive some opportunistic plaintiffs to file in Texas while they still can; we saw such a spike in filings in a similar situation in December 2015, just before new, more restrictive pleading standards went into effect. In the long term, a restrictive TC Heartland decision might force NPEs (and others) to file elsewhere—possibly adding to the allure of patent courts overseas.

A number of NPEs have already begun placing new emphasis on enforcement opportunity in Europe and Asia—although this shift is not evident in US-centric data and therefore somewhat invisible to the market at large. But there are clear anecdotal signs, not the least of which has been transactional activity in 2016 led by NPE stalwart Marathon Patent Group, Inc., and successful litigation out of Germany, France, and Italy by its subsidiary TLI Communications GmbH. Marathon is one of several once-prolific NPEs that have brought little US litigation, if any, in the last few years. We expect this trend to continue into 2017 as Europe’s Unified Patent Court springs to life.

Consistent Plaintiffs and Technologies

The 10 most prolific NPEs represent just 2% of the NPEs active in 2016 but account for 37% of the defendants added (Figure 7). IP Edge LLC, with its many affiliate entities, continued to emerge as the greatest force by a wide margin. It tops the list in 2016—alone driving 14% of NPE litigation, adding 400-plus defendants to over 30 campaigns, and using a classic file-and-settle strategy that involves little actual litigation.

NPEs continue to target a broad range of sectors, but the top sectors remain the same as in years past: E-commerce and Software, Consumer Electronics and PCs, Consumer Products, and Networking (Figure 8). Most notably, software cases have not disappeared, despite the growth of PTAB validity challenges and the availability of Alice challenges—both particularly applicable to that sector.

Likewise, the market sectors of patents brokered in the open market are fairly consistent. Each year, RPX reviews several hundred brokered patent portfolios.

In 2016, about 22% of offered portfolios focused on the E-commerce and Software sector. Each of the Networking, Mobile, Consumer Electronics, and Semiconductor sectors accounted for another 14–15% (Figure 9). But NPEs do assert these assets more broadly: E-commerce and Software portfolios, for example, are often asserted against defendants operating in industries such as Retail or Automotive.

The mix of patents, on the other hand, is very different (Figure 10). Portfolio sizes in the Semiconductor space are larger than in other sectors, making this sector the most significant portion of patents offered to RPX on the open market.

Accordingly, the size of portfolios is best viewed by sector (Figure 11). Most portfolios offered to RPX have fewer than five patents, but the median Semiconductor portfolio is three to six times larger than its peers. Individual portfolio size has increased by a few patents in the last couple of years for some sectors (Semiconductors, Consumer Electronics, Financial Services) and remained flat for others, but the largest portfolios in each sector range into the hundreds or even thousands. Such variation makes it difficult to discern a pattern in portfolio sizes overall. However, an increase would make sense: a larger portfolio offers an advantage against per-patent defenses like PTAB validity challenges.

PTAB Validity Challenges

PTAB validity challenges emerged in 2012 as an alternative to district court defense strategies, and instantly skyrocketed in popularity. They appear to have reached equilibrium at about 400-500 petitions per quarter (Figure 12).

The overwhelming majority of these petitions have been filed against patents that have also been asserted in litigation. Those nearly 3,000 unique patents, many of them challenged by multiple petitions, make up about 80% of all patents challenged in petitions to date. One could infer that, as expected, defendants appear to be using these petitions to complement their defenses in district court and as additional leverage for settlement.

But the converse is not true: challenged patents represent only about 17% of all patents in active litigations, leaving a significant portion of litigation unaffected by any PTAB challenge. For many defendants, this may be a simple cost-benefit decision: PTAB petitions typically cost hundreds of thousands of dollars, according to RPX’s cost survey. This makes the PTAB a cost-effective alternative to million-dollar district court litigation, but not necessarily for every case. For example, our study shows that IPRs are relatively cheap per petition—but also that single-petition IPR strategies are not always sufficient, and the cost of such multi-petition challenges can reach into the millions.

Of course, change is always looming. Pending cases like In re Aqua Products could change PTAB procedures—in this instance potentially giving patentholders greater opportunity to amend a challenged patent—and, likewise, change their popularity, impact, and cost.

Market Conditions

Patent brokers remain active on the open market. The most active offered dozens of portfolios in 2016 from a wide mix of sectors, as noted above. This is roughly in keeping with the past, although some previous top sellers have formed new entities, and others appear to be focusing on alternative strategies such as foreign markets.

It is not always clear just when today’s offerings might emerge in litigation down the line. However, studying just a fraction of past offerings (Figure 15)—a small portion of portfolios offered to RPX but bought by NPEs and ultimately litigated—we get some idea of what today’s market says about future litigation. If an NPE bought a patent on the open market and asserted it in litigation on January 1, 2016, such a patent would likely claim technology that is 14-16 years old and would have taken three to four years to make its way from the market to the courtroom.

In the year ahead, RPX will be monitoring and continuing to report on these and other litigation and market indicators. Questions, comments, or suggestions for future study are welcome at reports@rpxcorp.com.