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Patent Troll Myths

[cross-posted at Prawfsblawg]

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.

Thus 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) .

Below is a summary of some interesting things I found. There’s a lot more in the draft, of course.

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. 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. 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.

3 thoughts on “Patent Troll Myths”

  1. Michael,

    Do you have any baselines to compare the data to,(e.g. how many active patents are business method patents)? Only reason I ask is because it seems like there is a much bigger issue if .01% of all patents are BMs, versus current BMs patents accounting for somewhere near 8% of those issued.

    Also, why did you use patent issuance as the start of your timeline instead of first sale(or another time that is dependent on the infringers actions) of the issuing product? And does the date change much dependent on whether it’s an NPE v. small entity v. Corporation?

    Excellent work!

    1. Good questions. Answers:
      1. There are studies on business methods patents, and the percentage representation is much higher than the population at large. I think they are also larger (though not as much) for the population of litigated patents. I was looking more at the conventional wisdom that this is all that trolls enforce. I can look for and put some comparative info in.

      2. Getting first sale data is just way too difficult to get. I do look at time from issuance to assignment of the patent, and that’s also long. I can look at timing by type of entity – that’s a good question. My gut tells me there is no difference based on my recollection of the data, but that can easily be tested.

      [WORDPRESS HASHCASH] The poster sent us ‘0 which is not a hashcash value.

  2. Michael,

    A secondary market for patents (research) is just beginning so you would be unlikely to see any significant liquidity being provided at this stage of the market. VCs have generally been very slow to see that there might be value in the patents from unsuccessful companies.

    In the 1800s there was a thriving secondary market for inventions. In fact, Scientific American was created to promote the idea that an independent inventor could get rich licensing their inventions. What changed? Idiotic antitrust rules destroyed the secondary market for inventions, by first attacking various licensing arrangements, such as patent pools, and then by attacking patents directly.

    It is a straight forward application of Adam Smith’s division of labor that having a group of people focus exclusively on inventing is good for the economy. However, many corporations would rather steal other people’s inventions than pay the inventor for their product.

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