As recently as ten years ago, patents were almost entirely a positive thing for companies. They were the embodiment of a firm's innovative energy, both spurring the creation of new products and providing legal protection for those products in the marketplace.
Equally important, patents have helped preserve a healthy balance-of-power between competitors. Almost all companies today maintain large portfolios of broadly-applicable patents (which, for reasons described below, often have claims that are very similar to or overlap those of other issued patents), so there has always been a tacit understanding that any infringement litigation would be met with a countersuit. Truly intractable patent disputes – such as the recent Apple-Samsung court battles – might go all the way to trial and judgment, but for the most part companies have used patents to ensure market equilibrium and not to enforce legal rights.
Over the last decade or so, however, this benign balance of power has changed. The agent of that change is the non-practicing entity (or NPE), a firm that does not make products or sell services. The NPE business model is simple: acquire patents, identify operating companies that may be infringing those patents, and bring legal action to generate a settlement and/or license payments. Because they have no products or services, NPEs are not susceptible to being countersued.
And that, according the Hisao Yamasaki, has changed everything. Yamasaki leads the Asian operations for RPX Corporation, a leading patent risk management provider. He points out that where companies used to regard the patents they own purely as contributors to operating growth, today those same companies are being forced to see patents that they don't own as a source of large and unpredictable risk and expense. In 2011 alone, the total cost of NPE-driven patent litigation in the United States was $5.8 billion.
"That's up from $1 billion just six years ago and the trend is steadily upward," says Yamasaki, "And the number of companies being targeted by NPEs is rapidly expanding, too. In 2006, 499 companies were asserted by NPEs. In 2011, that had risen to 1,312 companies."
The problem, Yamasaki notes, is large, growing and increasingly global. "Our research shows that for the top 50 Asian technology companies, the number of NPE litigations has grown from 63 in 2006 to 234 in 2011," he says. In response, RPX has steadily expanded its outreach in Japan, Korea, Taiwan, and other regional technology centers, and will be hosting its annual RPX Asia Patent Conferences in Kyoto on October 22 and in Taipei on October 24. The events cover a wide range of issues, including recent attempts at patent reform, the spread of NPE activities into new vertical markets, troubling trends in how NPEs are being financed, and new ways to quantify and predict patent risk.
Founded just four years ago, RPX has already made a significant positive impact in the patent space by providing innovative patent risk solutions for operating companies, including those facing the threat of NPE litigation. It does so by taking a market-based approach to a traditionally legal problem.
"The problem," says RPX Chief Executive and co-founder John Amster, "is not that patents are being monetized; it is how they are being monetized. Any owner should be able to extract value from an asset, including patents. But NPEs use the court system to determine that value. It's a legal transaction, instead of a market transaction. And legal transactions are incredibly inefficient and costly."
In fact, according to a recent study by James Bessen and Michael Meurer of the Boston University School of Law, the total cost for responding to NPE litigation in 2011 was $29 billion, and RPX calculates that fully half of this cost was legal fees. No market-based transaction has anywhere near such high transaction costs.
RPX was founded in the belief that the most efficient and rational way to transfer value from patent user to patent owner is through an ecosystem with unlimited participants, complete price transparency, and broad sharing of valuation information. In short, a market. To that end, the firm has built a growing network of 120 operating companies, each of which pays an annual fee based on operating income. RPX uses this capital to acquire high-value, high-threat patents on behalf of all its members.
The size of its client base gives RPX the scale to compete with well-capitalized NPEs when bidding for patents. The cost of each acquisition is efficiently shared across the entire network. To date, the company has deployed $490 million to acquire more than 2900 patents and patent rights. The firm calculates that it has reduced NPE risk for its clients in aggregate more than 40% by acquiring patents that would have otherwise been litigated against them. The RPX solution is purely defensive and the firm specifies in every client contract that it will never offensively assert the patents it owns.
Amster notes that there are many factors contributing to the overall growth in patent risk for operating companies. The US Patent and Trademark Office has been faulted for issuing so many patents (more than 2.3 million since 2000, alone) and for issuing patents that so often have vaguely described claims or technology that clearly overlaps the claims in previously issued patents. This ends up giving NPEs access to an almost unlimited supply of patents that they can acquire and litigate against operating companies. It has also created a growing number of latent patent conflicts between operating companies with competing products.
"Clearly there are many points of friction in the current environment," Amster points out. "And any company that incorporates technology into its products or services and sells in the United States is bearing an increasingly heavy patent risk. But dealing with this risk doesn't have to be irrational and inefficient anymore. Our market-based solution shares the risk among multiple participants and dramatically mitigates the transaction costs. And as the RPX network continues to expand, we will be able to remove progressively more patents – and more risk – from the operating ecosystem."
There is clearly still a great deal of work to be done to fully rationalize the patent ecosystem, and RPX believes the current system can be further improved with a market-based solution and that billions of dollars in wasted transaction costs can be saved every year. Based on its success to date, the company appears to be on the right track.
For more information about RPX's Asia Conferences, please contact: events@rpxcorp.com
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