”When only a small fraction of what we are looking at is ultimately interesting to us, our brains can trick us. Using a structured decision-making process together with some tools can overcome those biases and allow us to identify and buy the patents that fit our business needs. “
Occasionally, we hear people say, “brokered patents are all junk.” This begs the question, “are operating companies and non-practicing entities (NPEs) spending hundreds of millions of dollars buying junk patents?” Luckily, the short answer is no. We know clients have successfully bought and used brokered patents to substantially alter their licensing and litigation posture at a lower cost than the alternatives. We also know that patents on the brokered market rank higher than average patents (See “Finding the Best Patents — Forward Citation Analysis Still Wins”, by Oliver, et al.). So why this disconnect? We are victims of our own cognitive biases and the behavioral economic traps that make it harder for buyers to find and buy patents.
Soup from a Stone
Imagine having piles of rocks from which you are to extract metals. Across all of the rocks, the metals are distributed as follows: 1% nickel, 1% copper, and 0.001% gold. Are these piles of junk? Well, if you are a nickel processor, you will lose money. If you work with copper, you will be profitable, but it will vary depending on the price of copper. What about gold? You will see a 600% return on your investment, even though gold is only 0.001%. In each case, consider how much rock you need to process to get your desired metal. In all of the cases, you need to remove 99% of the remaining rock.
Expectations play an important role here. The first expectation is that the vast majority of the rock will be thrown away. Next, you need to accept that some ores are not worth trying to extract and even that some ore may be left unprocessed. For example, the most profitable process will probably not extract 100% of the gold. Instead, the amount extracted will be based on detailed engineering models of how much gold can be cost-effectively extracted from the ore. Importantly, having to remove much of the nonvaluable rock to get to what you seek does not make the initial pile of rocks “junk.” It simply means that you need a well-planned process to benefit.
Finding patents in the brokered market is analogous; just like a gold processor, you need to set your expectations that you will need to filter out many of the patents. That may mean that you miss some that you might have otherwise wanted to buy. You should expect that only between 1% and 2% of brokered patents are useful for your business needs. Of those, you will only buy a fraction. Changing your expectations about the contents of the market and how you need to triage it can lead to greater success. In this article, we highlight some of the pitfalls that may prevent you from effectively buying patents. These pitfalls apply to buying patents off the private markets too.
Cognitive Biases and Behavioral Pitfalls
The starting point for patent buying is the intake of all the available buying opportunities. That is where our cognitive biases start to separate us from the valuable opportunities. Every year, 800-1,000 new patent buying opportunities enter the open patent market as packages. That’s about 10,000 patents from more than 100 sellers covering hundreds of technologies. If these packages arrive in your inbox it is easy to miss deals, get paralyzed by the quantity, or feel that you have to process a large volume of “junk” to find anything.
In working with buyers over the years we have seen a number of cognitive biases and behavioral economic pitfalls that can prevent companies from buying patents. Being aware of these pitfalls will help you to overcome them.
- Analysis paralysis. The more choices you have, the harder it becomes to make a choice. With thousands of patents coming to the market, there are a lot of choices. You might get overwhelmed by the quantity of patents—and the lack of tools to filter them easily. The risk is that no choice gets made.
- Regret aversion. People anticipate regret about prospective choices that might, in hindsight, be wrong. This regret often outweighs the value of the potential gains and often leads to inaction. For example, you may simply choose not to buy something for fear that you might be wrong and the patent could be invalidated years later. This regret may dominate even though buying now is expected to alter the course of a negotiation and could be done cost-effectively. The important part here is that, in our desire to avoid being wrong, we cannot make the right choice. This is similar to loss aversion, where we prefer avoiding losses over acquiring gains. For example, we may not want to buy patents even when the expected business benefit outweighs the risk because we overvalue the risk of the loss.
- Recency and confirmation biases. Assume that for the past six months, all you have seen are patents that do not fit your needs. In this situation, recency bias can make you falsely assume that no brokered patents are going to fit your needs. Similarly, if you already think the market only contains junk, this notion is reaffirmed every time you encounter a package belonging to the 98% that does not fit your needs–even though you know only 2% to be of interest.
- Herd behavior. If your peers are saying the market is junk, maybe it is? It is a natural human instinct to mimic the herd rather than decide for ourselves. Similarly, you may think that just because a patent has been on the market for a year, it must be junk because no one bought it. Well, that can be true (some patents really are junk). It is also true that some patents present narrow business solutions (e.g., the market is small, only a few companies operate in that business, there are few patent battles in that market), and it may take a long time for a buyer to have that specific need.
Setting Up for Success
So how do we overcome these biases? We all have them. What works? Here is how to get started:
- State your expectations. This is why we emphasize that you should aim to find 1-2% interesting assets. Clearly stating your expectations in advance is critical. In reality, this number may be either lower or higher for you, but you will avoid paralysis, regret aversion, and recency/confirmation bias if you align your expectations of the market around your prediction.
- Use a structured process. Establish a patent buying strategy, with clear stages to filter, sort and select assets. Having structure helps you develop decision-making processes that overcome cognitive biases. In particular, a structured process where you bring in your analysis, walk through your buying criteria, and move through decision stages, helps eliminate analysis paralysis. See “You Need Defensive Patents But You Don’t Have Any. Now What? A Case Study.”
- Use tracking tools. Whether you use Excel, an SQL database, or something else, keep track of the packages you review and, importantly, the reasons why you pass. You can use the data to improve your buying processes. Also, you can use the information if your buying criteria changes (you switch from looking for gold-related patents to copper-related). Ultimately, the data helps overcome the false intuitions that the biases create.
- Focus on your business need. Consider the impact of your decision on your business. Thinking in the context of how an asset might be effectively used by the business unit can help overcome the biases.
- Seek outsiders’ opinions. Look for input from people with a different perspective. If you regularly defend against patent suits, look for help from a litigator who asserts patents. The different perspective not only helps overcome biases, this person may be called on to help litigate the patent, so having them involved earlier can be helpful.
What happens when you start to apply some of the above techniques? Our clients find that, not surprisingly, about 2% of the brokered market can fit their needs. Further, the purchased patents are cost-effective solutions to their business needs.
Identify and Filter
So, are patents on the brokered market junk? No; it is our expectations and biases working against us that leads to such conclusions. When only a small fraction of what we are looking at is ultimately interesting to us, our brains can trick us. Using a structured decision-making process together with some tools can overcome those biases and allow us to identify and buy the patents that fit our business needs. Like the gold ore processors, setting your expectations and processes to filter out what you do not want while keeping an eye on what you do want helps you to identify the patents you need and want.
Image Source Deposit Photos
Image ID: 11034906