Understanding NPEs: Patent Troll Myths Debunked
|Written by Michael Risch
Professor, Villanova University School of Law
Of Counsel, Computer Law Group, LLP
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Posted: April 26, 2011 @ 2:05 pm
My study of non-practicing patent plaintiffs was sparked by a discussion with a colleague about where patent trolls come from. My theory was that patent trolls tended to enforce patents that startups obtained, but that lay fallow when the startups lost funding. Unfortunately, I had no data to back up my intuition, nor did anyone else. So, I thought I would gather that data. Ultimately, I was surprised about how wrong my own intuition was, which is why I focus on the myths about patent trolls. Just about everything we thought we knew – good or bad – does not appear to be true.
Lacking evidence to back up my intuition I began two years of data gathering. I started with the top 10 most litigious NPE’s (since 2003), as reported by Patent Freedom. With some help from Patent Freedom, I then found every case I could involving these NPEs (1011 in total) and then found every patent asserted in those cases (400 total). I then drilled down, recording information not only the patents, but who obtained them. Finally, I gathered information about the organizations that obtained patents (121 total).
First, contrary to popular belief, not all NPE patents are business methods patents. Indeed, only 32 of the 400 patents (8%) included class 705 (the patent class most associated with business methods). Another 88 patents are in patent classes usually associated with software, for a total of 31% for both business method and other software patent classes. This probably overstates the number, because patents may be assigned to more than one class.
Of course, there may be others that are not classified as software, but certainly not the other 69%. Classifcations included telephonic communications, television, video distribution, and computer hardware. Many of the patents, unsurprisingly, related to communications — a field of growing importance.
Second, the study finds that NPE patents do not overwhelmingly come from non-productive companies. Of the 400 patents, 286 were initially assigned to a company; there were a total of 121 unique companies listed as initial assignees on these 286 patents. More than 75% were assigned to corporations while the remainder were assigned to LLC’s and limited partnerships. Another five patents were initially assigned to three other entities: the U.S. government, a hospital, and a university.
Of the 121 entities classified, only 21, or 17%, were solely licensing entities at the time of patenting, accounting for 30 of the patents. In other words, a small portion of the patents were obtained by the purest of patent trolls. Another 50 patents were issued to inventor-owned companies. The remaining assignees (including some of the inventor-owned companies) either had or were attempting to build product or service based businesses at the time of the patent. There were many familiar names among these companies, including IBM, Xerox, AT&T, Motorola, Proctor & Gamble, Siemens, Harris Corporation, California Technical Institute, and Cedars-Sinai Hospital. Sales, employment, and venture capital data all imply that at least half of the companies contributing NPE patents had significant operations.
Also contrary to conventional wisdom, the patents were not castoffs from failed startups. Only 21 of the 121 entities are out of business.
Third, the NPEs do appear to be “trollish,” at least by the definition that they wait for an industry to develop. The average number of days between patent issuance and the filing of a complaint was 3124 (more than 8.5 years) with a standard deviation of 1976 days (5.4 years). Of course, this could mean that the patentees were ahead of their time, but even so, there appears to be significant delay before these patents were asserted in court. Even so, there were still plenty of patents that were rushed to the courthouse after issuance.
Fourth, contrary to the conventional wisdom that justifies patent trolls, I did not find clear evidence that NPEs enhance venture capital investments by providing an additional liquidity option. To be sure, firms with patents were 10 times more likely to obtain venture funding than firms without patents, but it is not clear that NPEs create this differential. There was no statisitically significant difference in investment percentage between a random population of patent holding firms and firms that contributed patents to NPEs.
Another consideration on this point is how many of the patents were contributed by failed startups. As noted above, only 21 of the companies who obtained NPE patents are defunct. More telling, however, is the fact that only 3 of the 21 failed companies received venture funding, while one additional company was publicly traded before going out of business. In other words, if NPEs are supposed to be a source of post-failure liquidity in order to encourage venture funding, they are doing a very poor job of it in practice. On a related note, it does not appear that many of the NPE patents come from small companies crushed by their competitors.
Fifth, I did find that NPEs provide a valuable enforcement option for individual inventors who obtain patents. In short, NPEs enforce around twice the percentage of inventor plaintiffs than appears in a random population of litigated patents.
Finally, the article makes some general observations about patent quality – namely that patents asserted by NPEs look a lot like patents asserted by productive companies according to objective measures. The next phase will look at the litigation outcomes to determine the patent quality of the studied patents. I hope to learn much more about quality over time and by technology category, among other things.
In the meantime, I look forward to any comments readers have about the study or its conclusions. The article may not change too many minds about patent trolls. Those who believe NPEs are bad for society won’t care much about where they came from. However, I think that NPEs are a reflection of inventive society — their patents come from all sorts of sources, and how we feel about NPEs should depend on how we feel about the people who invested in the research that create the patents and the role patent law played in innovation.
About the Author
Michael Risch is an Associate Professor of Law at the Villanova University School of Law. Prior to joining the Villanova faculty he was at the West Virginia University College of Law, where he directed the Entrepreneurship, Innovation and Law Program. Professor Risch’s teaching and scholarship focuses on intellectual property and cyberspace law, with an emphasis on patents, trade secrets and information access.