Thursday, May 5, 2011

Data points on US patent litigation and the huge patent assertion business

Yesterday's IPO of patent aggregator RPX Corp. took the three-year-old company to a billion-dollar market capitalization. I don't mean to comment at this point on the business model of RPX (or on that of Intellectual Ventures, where its founders previously worked). For now I just want to glean some useful data on patent litigation and assertion in the US from the IPO prospectus and media reports.

Companies going public must take great care in how they describe their business and the market in which they operate. Any distortion, particularly an overly optimistic outlook, can result in liability issues. That's why the numbers RPX states in its prospectus are most probably very conservative estimates. Some of them are also very vague, sometimes stating just a scale instead of specific numbers.

Total patent litigation cost in the "tens of billions of dollars in the United States from 2005 to 2010"

RPX looked at the total number of patent lawsuits in the US during that period and at the different cost levels on a per-defendant basis.

In an interview with Xconomy, a venture capital investor who funded RPX and poured $300 million into Intellectual Ventures, estimated that "there’s a $50 billion-plus market in IP rights and licensing, versus a $6 billion litigation market based on legal fees." Those are annual numbers, while RPX's "tens of billions" statement related to a six-year period.

40,000 defendants from 2005 through 2010 (some of them named more than once)

RPX figures, based on its own analysis and third-party data, that patent infringement claims were filed against more than 40,000 defendants in the US from 2005 through 2010. That number of 40,000 includes "companies that were sued more than one time." The wording used by RPX could be clearer in terms of whether they mean some of the 40,000 were sued more than once or whether we're talking about 40,000 instances in which some plaintiff named some defendant, which would result in much less than 40,000 unique companies. I assume that the latter is the case. (In connection with non-practicing entities, RPX uses an unambiguous wording.)

Almost 1% of those instances were brought about by GeoTag Inc., a company against which Microsoft and Google are jointly taking action. Considering that GeoTag asserts only one patent while other litigants hold many, it's pretty obvious that GeoTag is disproportionately litigious.

Non-practicing entities responsible for annual costs "in the billions of dollars"

RPX's prospectus narrows in on the activity of non-practicing entities, colloquially often referred to as "trolls." Analysis conducted by RPX showed that "there were over 600 patent infringement cases filed by NPEs in 2010 against more than 4,000 defendants, which comprised over 2,000 unique companies, some of which were sued more than once. Most cases are resolved prior to trial but still result in significant defense and settlement costs. For cases that reached summary judgment or trial, a study of over 1,500 final decisions found that damages awarded to NPEs had a median value of $12.9 million during 2002-2009."

Of the more than 4,000 defendants named as defendants by NPEs in 2010, GeoTag alone accounts for almost 10%, which again underscores how outrageous that particular company's actions are.

Defense costs per claim vary greatly

RPX says that the costs of defending and resolving a patent litigation claim "can range from modest, such as $50,000 for nuisance suits, to substantial, such as tens of millions of dollars or more in the most complex cases."

Developments that "have led to an attractive environment for patent assertions"

RPX provides a non-exhaustive list of six particular reasons for which there's so much patent assertion going on. There are two items related to Internet search as a powerful tool, and the sixth and final item relates to the Court of Appeals for the Federal Circuit. Factors (iii) to (v) make particular sense in connection with smartphone patent litigation:

"(iii) a proliferation and overlap of technology patents, (iv) the use of multiple technology components in a single product or service, (v) an increase in the number of businesses that make, use or sell products or services that utilize technology"

I'll keep an eye on other patent market data and will publish interesting and updated numbers here when I stumble on them.

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