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Intellectual Ventures, IP, IP Asset, Patent

Do NPE’s “Cost” Us $29 B? Intellectual Ventures Co-Founder Peter Detkin Sets The Record Straight

The BBC ran another article in a tired meme about evil patent owners supposedly “costing” billions per year.  Of course, the article doesn’t specify who supposedly bore this $29 B “cost” or how it was calculated, but instead cites a Boston University paper by Professors James Bessen and Michael Meurer.   According to the BBC article, “Intellectual Ventures, one of the highest-profile NPEs, was not available for comment.”  However, an IV spokeswoman told Gametime IP that she was surprised by the article and that the BBC had not, in fact, reached out to them for comment.  Fortunately, I did speak with IV co-founder Peter Detkin, to get his take on Bessen and Meurer’s latest research, and the role of NPEs in general.

Previous work by Bessen and Meurer has already been debunked by Gametime IP not once, but twice.  While the previous research included substantial flaws in assuming a direct correlation between stock price and patent owner activity, the new paper rests mainly on survey data collected through the Coalition for Patent Fairness and RPX, focusing on the amount of money spent by companies to defend and resolve patent claims against NPEs while inferring effects of NPEs generally based on only a subset of NPE behavior.

“They are taking a small piece of the puzzle and extrapolating out to the entire puzzle,” explains Detkin.  He believes that the basic premise behind the research is a real phenomenon–that there are bad actors who impose costs onto everyone because of the improper way in which they use the legal system.  “When I coined the term ‘troll’ more than 10 years ago, I was talking about people who take specious patents that were likely invalid and asserted them broadly across an industry to extract nuisance value settlements.”  Ten years later, Detkin thinks some of the research validates his suspicions that a lot of people are “gaming the system and that there is a consummate cost to society.”

What’s improper, Detkin warns, is inferring based on this subset of patent activity onto NPEs as a whole. “They take that point and then say ‘therefore, all patent assertion by non-practicing entities is bad.’  And that’s like saying all personal injury litigation is bad.”  Are there people who game the personal injury system? Sure, says Detkin. “But that doesn’t mean we should eliminate the entire personal injury system because, on balance, we think it serves a purpose.”

As evidence that Bessen and Meurer cast too wide a net over their supposed ‘bad actors’ is the rather cursory treatment of NTP, Inc.  The Boston paper calls the company’s lawsuit against Research in Motion “a good example,” adding that “NTP asserted patents of doubtful validity but managed to win at trial and obtain a settlement of $612.5 million from RIM.”  The paper refers to NTP as an example of a “big game hunter,” lumping their activities in with other NPEs.  Detkin takes issue with the rather cursory manner in which the ‘big game’ activities are treated by the paper, adding “To me, when you win at trial and on appeal, that means that your patents are not of ‘doubtful validity’ anymore.”  In fact, the amount of the settlement alone speaks volumes about the strength of NTP’s claims.  As former head of IP litigation for Intel, Detkin agreed, saying “I would have to be hard pressed to go to my management and say ‘You should pay more than half a billion dollars for patents we don’t think we infringe.'”

Another aspect of the Bessen/Meurer paper is the assumption that money flowing to NPEs, as opposed to flowing directly to inventors, is supposedly “lost.”  The BBC notes the paper’s $29 B “estimate” against total R&D spending for 2009 of $247 B.  In other words, the estimated “losses” accounted for 11.5% of R&D spending.  In light of that figure, the article goes on to mention an other inane statement mentioned from the paper:

The authors added that about one quarter of the cost of NPE litigation consisted of legal fees – money, they said, that could otherwise be used to fund innovation.

First of all, companies pay fees for things other than NPE litigation, including paying legal fees for other administrative functions, taxes, accountants to figure out how much to pay in taxes, auditors to make sure the numbers accountants work with are correct, and salaries for sometimes ineffective managers.  All of this money could be spent on innovation, but it’s all necessary as part of running a successful business.  Sophisticated companies should think of legal fees, even fees spent defending NPE litigation, in the same way. “Just like keeping your aisle-way clean is a cost of doing business for a grocery store–as is paying for injuries caused when your workers are negligent–when you come up with a new product and you want to build on the inventions of those who came before, you have to pay to use those inventions.”

Lost in this conversation, however, are costs incurred by patent owners who find they are unable to obtain fair value for use of their patents without resorting to lawsuits.  Behind every NPE is an inventor or someone who invested (directly or indirectly) in an inventor.  The same is true whether it’s a company using employee-technology to create and sell products, or whether an NPE buys a patent portfolio Detkin mentioned an example the world took notice of last year: “Nortel is the extreme. People invested in Nortel; the bondholders got their money back, and they can go on to invest in the next great thing.”

Delays and expenses associated with collecting a return on that investment limit the amount that could otherwise be re-invested in future inventions.  Inventors are faced with a Hobson’s choice between giving up a large share of future wealth produced from an invention or possibly getting nothing at all in return for their work.  Either way, inventors sacrifice resources that could be re-invested to create new technologies that benefit future generations.  Detkin’s company invested billions into acquiring invention rights, including more than $400 M paid to individual inventors according to an IV spokesperson.  “Perhaps [Bessen & Meurer] are faulting us for not paying inventors enough, and we can argue about what is a fair deal. But I haven’t heard any inventors coming back and saying we short-changed them and, more importantly, it’s a lot more than they would have gottenbefore we came long because this market did not exist.”

In reality, both inventors and implementers have a role to play in creating and incorporating new technologies.  However, its long past time to worry about wasteful legal expenses for only one half of the innovation cycle.  Instead, patent owners and operating companies should work together to eliminate unnecessary transactional costs associated with licensing. Doing so benefits inventors and innovators alike, which ultimately benefits us all.

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Discussion

13 thoughts on “Do NPE’s “Cost” Us $29 B? Intellectual Ventures Co-Founder Peter Detkin Sets The Record Straight

  1. Bessen and Meurer’s results are based on a small, selective, and massively biased data set. Their assumptions are questionable, and their analysis fails to carry through any sensible estimates of confidence (i.e. ‘error bars’) on their numbers. Not only is it impossible to determine what proportion of the alleged $29 billion is actually a ‘cost’, it is impossible to determine whether the $29 billion figure is even remotely accurate. But some basic sanity checks suggest not.

    If something sounds unbelievable, the logical response (absent highly persuasive evidence) is NOT to believe it! Unfortunately, too many journalists these days do not have the time or inclination to apply logic.

    I have pulled the study apart on my blog, here: http://blog.patentology.com.au/2012/06/29-billion-us-troll-tax-or-just-another.html

    One thing that Bessen, Meurer, Detkin and I all agree on, however, is that there are bad actors in the system, and that the real trolls are imposing a cost. The problem is, we still do not know what that cost is, and the current study from Bessen and Meurer is only a small, faltering, step on the path to finding out.

    Posted by Mark Summerfield (@patentology) | June 28, 2012, 6:34 pm
    • Mark – thanks for the comment and the link to your post … What we have in Bessen & Meurer’s research is, not only flawed results, but even if results are accurate, flawed/biased conclusions.

      Posted by Patrick | June 29, 2012, 9:32 am
  2. The comparison between general administrative costs and NPE litigation is bogus. That’s like saying every person should have cash on hand to cover a rare event like a brain tumor. And fine if Detkin takes issue with a particular case, but it’s clear that a huge portion of NPE activities are in essence extortion through patents that often shouldn’t exist anyway.

    “It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.” ~Upton Sinclair

    “It is possible for one never to transgress a single law and still be a bastard.” ~Hermann Hesse

    Posted by Mike | June 29, 2012, 10:26 am
    • What exactly makes up a “huge portion?” A third? Half? Do you have any way of quantifying that or are you just trollollolling?

      Posted by RealMike | June 29, 2012, 12:51 pm
      • Yes, I work in the arena. I’ve spoken with hundreds of defendants and analyzed some decent data that Bessen and Meurer have actually used, although I’m not going to defend their work for them. Clearly nobody can quantify “x% of patents are crap,” but qualitatively I’ve got a fair sample. Do you really believe that the rise in NPE activity is about liquidity in a market for innovation? IV is looking out for the little guy and so are the big tech companies? (And nothing against the productive activity of big tech.) This country would be a lot better off without software and business method patents, and with shorter patents in other markets (such as mobile phones). All that’s beside the main point in commenting on this piece, which is that Detkin and IV are not making honest arguments and they know it.

        Posted by Mike | June 29, 2012, 1:28 pm
  3. I usually ask people with the “NPE actions, and any patent infringement actions, prevent innovation” meme if they would let a neighboring company set up shop on their lawn? Both are types of real property, after all. The answer is always, “No, but….” And then they turn to whether a given patent is even valid (“Someone got a patent for a swing [which was invalidated]!”).

    Posted by RealMike | June 29, 2012, 12:54 pm
  4. Good points Mark on the flaws in the study.

    The conclusions drawn in the study are also biased against the new players without considering PAEs like IBM who assert a large portion of their portfolio in areas they don’t operate in, making them de facto NPEs for those fields. This is viewed as an effective strategy for monetizing unused assets through aggressive licensing campaigns.

    However, when a company like IV does it, it is viewed as trolling. The difference is that IV monetizes unbooked assets by “crowdsourcing” the small inventors who weren’t able to monetize their patents on their own. So, the economic benefit is hard to quantify because it cashes in the sunk costs of numerous individuals, as opposed to the unused assets of a large company’s portfolio.

    I wrote about this extensively on my site:

    http://www.flashpointip.com/who-are-the-good-trolls-on-apple-ibm-iv-trolls-portfolios/

    The monetization scheme of a patent aggregator relies on such efficient crowdsourcing to command discounted pricing on asset acquisition which I believe is why Peter Detkin emphasizes the distinction between IV and trolls.

    Posted by Reuven | July 1, 2012, 12:47 am
  5. I think that one problem with some NPEs is that they operate in a manner that prevents sufficient transparency in the market for IP rights. For example, if an NPE uses shell corporations when purchasing assets, a seller may not be aware of information that might alter their negotiating posture since they may not be aware that their patent has particular value to the buyer. Secondly, if an NPE fails to disclose which parties will benefit (such as investors in the NPE) from purchase of a patent by obtaining a license, then again the seller is denied information that might impact their negotiating posture (since if they know that a particular party will obtain a license, then they may prefer to negotiate differently or not at all).

    One way to look at these issues is to ask whether NPEs and the ways in which certain NPEs operate are consistent with the public policy values underlying the patent system. Or, to put it another way, should the exchange of federally granted patent rights (which were created and granted in order to assist in fulfilling a specific purpose) be subject to the same free market forces and behaviors as other “goods”?

    Posted by Concerned | July 1, 2012, 10:24 pm
  6. The Patentology blog does a nice job deconstructing this study. One glaring problem the blogger pointed out is that, in their study, Bessen and Meurer do not differentiate among different types of NPEs — for instance, they don’t distinguish between independent innovators who license their inventions, universities, and the loathsome patent trolls. Sorry, but it doesn’t make much sense to me to put these 3 groups in the same category. For one thing, whereas the dreaded “trolls” often tend to create an inefficiency problem in the economy, small inventors (who, like Edison, may choose to have others manufacture their products) and universities may add quite a bit of economic and creative value.

    Posted by patent litigation | July 4, 2012, 12:03 am
  7. Patrick.

    The greatest danger these NPEs have on patents is that they are severely impacting public support for patents especially software patents where they are having a devastating impact on the entire industry. There is a backlash against strong IP inforcement because we have so many unscrupulous companies and people abusing them.

    A lot of blame goes to Congress for inaction and especially the US Patent Office who have approved too many patents that should never have been approved in the first place. Abstract ideas or obvious inventions are not supposed to be patentable. However, we have seen so many ridiculous patents being approved that are so general and overly interpreted as to fit almost anything in them. General principles are not patentable but specific and unique implementations. However so many are not specific nor unique. In fact many software patents are for things that already exist in the physical world but merely have the term \”on the internet\” or \”on a smart phone\” attached to them. Things like menus or shopping carts or general and obvious things like that should not be patented however the Patent Office has approved them and many others just like this.

    Thank goodness some victims are now fighting to get these patents invalidated and there have been some good successes of late but it will take years to fix the extreme damage the US Patent Office caused due to its incompetency and misguided attitude that the more patents the better when in reality patents should be a rarity and only for things that are truly unique and ground-breaking or for things that have extremely high developmental costs.

    Here are some good patent reforms that have been suggested:

    A panel of industry experts must be consulted on whether the patent is unique and no prior art exists.

    Challenges to patents must be available by interested parties prior to the patent approval.

    Short time limits for patent holders who do not develop a product.

    Improvements on existing patented products should be protected as long as they are not too similar.

    Multiple independent patent registrations for similar products should nullify all patent registration since that would indicate obviousness and lack of uniqueness.

    Give courts power to strip patents of abusers.

    Criminal penalties for companies or individuals who abuse patent law.

    Posted by kbingh | July 7, 2012, 2:25 pm
  8. Patents are clearly a NET NEGATIVE to society. There is no credible evidence that patents benefit society and increase innovation. Patents and copyrights should be abolished. Read the book: “Against Intellectual Monopoly” by Boldrin and Levine: http://levine.sscnet.ucla.edu/general/intellectual/againstfinal.htm

    Posted by AD | July 17, 2012, 5:43 pm

Trackbacks/Pingbacks

  1. Pingback: IV’s Peter Detkin Dismisses BU Law Study | nonpracticingentities - June 29, 2012

  2. Pingback: Patent Scholars Challenge Bessen & Meurer’s Bogus $29 B NPE Costs Figure « Gametime IP - July 30, 2012

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