In a paper published on July 25, 2012 (available from SSRN), Chicago-area scholars David Schwartz and Jay Kesan challenge a study by Boston University professors James Bessen and Michael Meurer, which claimed that patent litigation generated by so-called “non-practicing entities” imposes direct costs of $29 B. Intellectual Ventures’ Peter Detkin and Patentology’s Mark Summerfield already challenged a number of the premises and conclusions behind the Bessen/Meurer paper, which was, not coincidentally, funded by corporate giants, such as Google, Cisco and Amazon.com through funding from the Coalition for Patent Fairness. Detkin’s holistic view demonstrates Bessen & Meurer’s inability to reconcile anecdotal occurrences of specious patent assertions with the broader business models surrounding patent licensing and monetization, while Summerfield’s critique sharply attacks the pair’s methodology and failure to provide enough data to assess the reliability of their conclusion.
Schwartz and Kesan–whose paper is the product solely of academic research, not corporate funding like Bessen & Meuerer–focus their critique on problems in Bessen & Meurer’s data gathering techniques. Essentially, the Chicago pair argues that the $29 B NPE “direct cost” figure is based on data gathered from a biased data set, while the benefits of NPEs are poorly accounted for. From the study, Analyzing the Role of Non-Practicing Entities in the Patent System:
(1) Figures Based on Biased Sample. Bessen & Meurer’s $29 billion calculation of the direct cost of NPE patent assertions should be viewed as the highest possible limit. The true number is very likely to be substantially lower. It is the outer bound because the survey is not a random sample; instead it likely is a biased sample, which renders Bessen & Meurer’s extrapolation of the total costs similarly biased too high.
(2) Lack of Basis for Comparison of Figures. The vast majority of the $29 billion figure consists of settlement, licensing, and judgment amounts. For economists, these are not “costs,” as they are classified in the Bessen & Meurer study, but rather “transfers.” Such transfers to patent holders are the contemplated rewards of the patent system. Furthermore, before declaring litigation costs (i.e., lawyers’ fees) too high, there must be some basis for comparison. Bessen & Meurer provide no such comparison. For further academic studies, we propose comparing them to either the ratio of lawyers’ fees to settlements in practicing entity patent litigation or complex commercial litigation more broadly.
(3) Questionable Definition of NPE. Bessen & Meurer’s calculations rest upon a questionable and very broad definition of NPE. We suggest that they disaggregate among different categories of NPE, which should be possible with RPX’s database.
(4) Lack of Credible Information on Benefits of NPEs. Bessen & Meurer’s estimate of the benefits of the benefits of NPE litigation is based upon an analysis of very limited information, namely SEC filings from 12 publicly traded NPEs. We recommend a survey of NPE plaintiffs analogous to the survey of NPE defendants to provide more complete information on this issue.
Schwartz and Kesan present a compelling critique that soundly calls into question the reliability of Bessen & Meurer’s conclusion. Further, the amount of important data excluded from Bessen & Meurer’s paper, combined with financial support from the Coalition’s broad array of corporate members, raises suspicion about the Boston University authors’ motives. The sum total of affairs leads many familiar with IP monetization to believe that Bessen & Meurer paint a completely backward view of the benefits of IP as a whole.
IAM Magazine’s Joff Wild came to a similar conclusion, writing that “In fact, as things stand the likelihood is that they [Bessen & Meurer] are wrong, perhaps spectacularly so. The onus now is surely on the Boston University pair to respond to the points Schwartz and Kesan have made. Let us hope they do so sooner rather than later.” Of course, a question still remains about how widely distributed the Schwartz & Kesan study will become. Hopefully, every journalist who covered Bessen & Meurer’s paper has already received a copy, but it remains to be seen whether Schwartz & Kesan’s work garners the attention it so clearly merits.