Patent Assertion Entities Invest Twice as Much in R&D as Major U.S. Tech Firms

By Steve Brachmann
November 1, 2018

On Monday, October 29th, Stanford University’s Hoover Institution Working Group on Intellectual Property, Innovation, and Prosperity (Hoover IP2) issued a revised working paper looking at the effects of patent assertion entities (PAEs) on the innovation economy in the United States. The paper, co-authored by Noel Maurer of George Washington University and Stephen Haber of the Hoover Institution, found that a collection of public companies identified by patent risk management firm RPX Corporation as PAEs don’t fit the hypothetical model of “patent trolls,” the moniker with which these companies are often maligned. Further, rather than frustrate innovation, Maurer and Haber found that these companies have research and development expenditures which, on average, are twice that of U.S. high tech firms.

The working paper starts off with a simple question: “Do firms that earn revenues from licensing patent portfolios, rather than producing physical products—often called patent assertion entities (PAEs)—frustrate or facilitate innovation?” To answer this, Maurer and Haber examined a sample of 17 years’ worth of U.S. Securities and Exchange Commission (SEC) filings made by 26 publicly-traded PAEs to estimate spending on litigation and patent acquisition. The authors relied on RPX’s definition of PAEs so that they didn’t have to create their own definition which might create selection bias. The authors’ methodology also included aggregation of firm-level data for 153 large high tech firms and an exploration of harmful aspects of PAEs as defined by government agencies during the Obama Administration and academic literature.

In the first stage of the authors’ analysis, they find that the public PAEs do not appear to operate in a manner consistent with the hypothesis on patent trolls, which includes the view that PAEs own patents which have no value and that they file frivolous lawsuits that amounts to a tax on innovation. Far from spending only a negligible amount on R&D expenditures, a hallmark of the patent troll hypothesis, these identified PAEs spent twice as much on R&D than 153 firms identified in PricewaterhouseCoopers’ 2017 Global Innovation 1000 study during the period between 2011 and 2016. 17 of the 26 identified PAEs spent either the same share or more of their revenues on R&D as major tech firms Apple or Hewlett-Packard.

The PAEs in the study also didn’t appear to be successful with a business model of obtaining money through nuisance lawsuits, another supposed characteristic of patent trolls. “If they were filing nuisance lawsuits using valueless intellectual property, then they would be highly profitable,” the authors note. To the contrary, as a group these 26 firms lost $3.1 billion between 2000 and 2016, with only six firms yielding positive returns for shareholders during that time. Further, these firms are modest in size, most having revenues “lower than a typical Safeway supermarket” and thus don’t pose the systemic risk to which many suppose that PAEs contribute.

In the second stage of the analysis, Maurer and Haber attempt to estimate the “innovation tax” potentially created by the group of PAEs. The findings in this stage indicate that the group of PAEs identified by RPX is too small to have much effect at all on the U.S. high tech sector. Revenues and litigation costs transferred from the high tech sector to the PAE group averaged 0.28 percent of revenues for the high tech sector between 2011 and 2016.

The authors also conducted a third stage of analysis in which they assessed publicly available information for three major private PAEs: Intellectual Ventures, Rockstar Consortium and Conversant IP. Not only do these firms behave and perform similarly to the identified public PAEs, the addition of the revenues and litigation costs stemming from these firms do not substantially change the magnitude of any potential innovation tax that PAEs create.

While the authors point out that they’re not claiming that patent trolls don’t exist, nor is it clear that the RPX-identified PAEs are helpful intermediaries in the market. However, by “operationaliz[ing] the characteristics of harmful PAEs” based on claims made by the government and academic literature to yield testable predictions and building and analyzing a dataset regarding identified PAEs, the authors found that “the testable predictions of the patent troll hypothesis are inconsistent with the data.” The authors also specify evidence that would render their analysis invalid as a guide for future research.

The Author

Steve Brachmann

Steve Brachmann is a writer located in Buffalo, New York. He has worked professionally as a freelancer for more than a decade. He has become a regular contributor to IPWatchdog.com, writing about technology, innovation and is the primary author of the Companies We Follow series. His work has been published by The Buffalo News, The Hamburg Sun, USAToday.com, Chron.com, Motley Fool and OpenLettersMonthly.com. Steve also provides website copy and documents for various business clients.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

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  1. valuationguy November 1, 2018 9:19 am

    FINALLY…..some real data countering the “patent troll” meme.

    However, I would qualify the conclusion by saying that the 0.28% of the tech sector revenues which go to the PAEs is HEAVILY SUPPRESSED by the past 12 years of patent enforcement weakening decisions which have come out of the courts (and the PTAB) since the EBay v MerXchange decision which eviscerated injunctions. The actual contribution had the Court actually be ENFORCING patents would likely be around 1.5% of revenue….or six times greater..(note: the 1.5% is my personal estimate). Still NOT MATERIAL to the overall U.S. economy….but significantly greater than the study indicates.

    It gives a good indication that the efficient infringement lobbing effort has spectacularly succeeded……resulted in tech companies increasing their average gross margins by 122 bp across the $6.4T in revenue earned by the 154 high tech companies in the study over 2011-2016….or $78B in actual cost avoidance in just a 5-year period.

    That is $78B (or $13B annually) effectively STOLEN from the rightful patent owners based on infringement activity over a 6 year period…at a LITIGATION COST to the tech companies of $18B (or $3B annually).

    This is a net positive gain for the tech companies of $60B (or $10B annually)….while the revenues of the public PAE’s was reduced to just $24B (or $4.0B annually)…when it SHOULD have been $102B (or $17B annually).

    Now you know why Stanford professor Mark Lemley (the father of efficient infringement) and other academics have worked tirelessly for Google, Apple and other major tech companies to weaken the enforcement mechanisms for patents and destroy the value of patents altogether.

    My only real surprise is the this study was done by one of Lemley’s fellow professors at Stanford….Steven Haber.

  2. Pro Say November 3, 2018 7:47 pm

    Thanks Steve.

    A better title for this eye-opening, jaw-dropping paper:

    What Apple, Facebook, Amazon, Google and All the Other Members of the Infringer Lobby Don’t Want You, Congress, or the Courts to Know

    Sub-Title: The Truth About P.A.E.s

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