Understanding NPEs: Patent Troll Myths Debunked

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.  Ultimately, 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.

Lacking evidence to back up my intuition I 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.  A full copy of the study is available at: http://papers.ssrn.com/abstract=1792442.

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. 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.


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Join the Discussion

16 comments so far.

  • [Avatar for Jared]
    May 17, 2011 11:45 am

    If you own a patent, but you do not use the patented invention in a product or service, you are still entitled to enforce your patent. You are known in the world of patents and patent enforcement as a “non-practicing entity” or “NPE” — or more rudely put, a “patent troll.”

  • [Avatar for American Cowboy]
    American Cowboy
    May 3, 2011 01:33 pm

    “abuse the system through arguably-excessive patent litigation.”

    If it abuse, use rule 11.

  • [Avatar for patent enforcement]
    patent enforcement
    May 2, 2011 09:13 pm

    One thing I find interesting in a recent FTC report is the FTC’s distinction between “good” NPEs and patent trolls (which it refers to as “PAEs”). Many have long noted that there is a need to differentiate between NPEs such as universities and those other entities who abuse the system through arguably-excessive patent litigation. Distinguishing between those bad actors and other NPEs may be helpful in narrowing the focus and the terms of the debate over patent trolls.

  • [Avatar for American Cowboy]
    American Cowboy
    April 29, 2011 11:10 am

    Ms Sprunger says “If one accepts as a premise that anything in patent law can be ‘objective’, then the existence of multiple art references that support an extremely strong argument for invalidity should be ‘objective’ evidence that those claims are ‘demonstrably overbroad.”

    With that premise in mind, why be so fearful of re-examination? Yes, it has estoppels and such, but golly girl, you say you have an “extremely strong argument.” Is your confidence in the PTO SO LOW that you think they will screw that up?

  • [Avatar for Blind Dogma]
    Blind Dogma
    April 29, 2011 10:48 am

    These choices and behaviors are objective matters of fact.

    Suzanne, no one is arguing otherwise.

    What is being argued is that this perfectly legal behavior is still being labeled with a pejorative – based purely on what others’ subjective views of what proper behavior should be. The right to pursue (and protect) one’s rights – no matter how aggressively (as long as the legal rules are met) simply do not merit the pejorative. Your use of “troll” is still a demonizing tactic.

    You continue to ignore the subjective element and masquerade your position as a purely objective stance.

    It is not.

    The purely objective stance would be the cold analytical legal view. Your first prong then still fails, as to meet the “demonstrably” criteria necessarily means that the patent has been successfully challenged and has been found invalid. If that is the case, then the argument ceases. End of story. However, you facially revoke the earned right on some non-legal view of “objective” without affording that person with the earned rights the protection under law of due process. Hardly an “objective” stance to hold.

    As has been noted in various forums, the “getting the relevant art information to applicant and examiners” both confuses the issue and chases a red herring to a certain degree. The confused issue is that by indicating a need to “get[ ] the relevant art information to applicant” you are placing some (non-existent) duty on the applicant to research and know the current state of the art. There simply is no such duty. The knowing the state of the art is a duty – just not the applicants’. The duty belongs to the professional who examines the application. Inventors focus on what they are doing – not on what everyone else is doing. Your premise underlies a concept that in practice has been ruled illegal – see Tafas.

    The second half of your position – that the examiners are not doing a proper job (for whatever reason) may or may not be true – or perhaps better stated, examination can always be better. However, in the real world examination cannot ever be perfect. There will always be a trade-off between examination quality and time and resources required. Yes, striving for better and more efficient examination should be a focal point (and one alarmingly absent from the current “Patent Reform.” I will put to you though, that punishing the applicant by subjecting the applicant and the earned patent right to repeated and potentially relentless attack by established deep pocket entities is not the way to go. Corrective measures must be very careful to not favor the established for the very reason that innovation will always threaten the established. It is the nature of innovation and to promote innovation one must be willing to protect the nascent and yes threatening patentees.

    I wanted to address your concerns about target licensees (that you suppose are most likely to know about the relevant art) and their decisions not to disclose that art due to uncertainties of ex parte procedures and the estoppels of inter partes reexamination. Please explain why a different person’s conscious choice should impact a patentee’s rights? Please explain why existing legal avenues are insufficient to get the relevant art information to the examiner? The problem is not the legal avenues. The problem is that the very people who have this “relevant art” choose not to provide it. Thus the “red herring” is based inpart on others’ choice – not the patentee. If you want others to provide that relevant art, there is always a mixture of carrot and stick methods to cajole the submission of that art. And yes, different elements of carrot and stick can be looked at (again, protecting the nascent should be a primary concern). But do not lose track that it still comes done to a choice – and that choice is not in the hands of the patentee. Do not punish the patentee for the choices of others.

    With that in mind, I lean heavily towards the stick. If the entrenched choose to hold onto their art, then let them suffer the consequences. Being purposefully ignorant currently is a choice taken to avoid possible treble damages. Instead, I would hold that information in patents to be de facto known. As those seeking patents face this same burden (with the requirement to overcome the legal fiction of one having ordinary skill in the art knowing ALL information – and with KSR arguably broadening that reach to any art field that touches a similarity in the solution), I have no problem with imposing this legal fiction on those that would be affected by patents. In fact, such a mandate would drive an assiduous following of patents – rather than ignoring the treasure trove, which defeats the purpose of having the disclosures in the first place, such a policy would maximize the dispersion of knowledge.

    I do not understand your question of third parties who do not have any litigation exposure – I might assume that this third party reference is the USPTO. If that is the case, I would point out that by law it is that very third party who is responsible for examination. If that is not the case, please clarify.

  • [Avatar for Suzanne A. Sprunger]
    Suzanne A. Sprunger
    April 28, 2011 11:47 pm

    I agree with all those who have commented that the term ‘patent troll’ is pejorative – that’s why I would never use it in a way that could be considered interchangeable with ‘NPE’. Perhaps in my definition of patent trolls above I should have used the term “demonstrably overbroad” to describe the claims of patents asserted by such. If one accepts as a premise that anything in patent law can be ‘objective’, then the existence of multiple art references that support an extremely strong argument for invalidity should be ‘objective’ evidence that those claims are ‘demonstrably overbroad’. And that’s what I meant by the sort of claims that I believe have led to the use of the term ‘patent troll’.

    Perhaps there are statistical indicia that can suggest whether a patent is more likely to contain some ‘demonstrably overbroad’ claims, but I think there are more specific and ‘objective’ clues that can be applied to individual claims. In the biotech area, method claims that do not contain any limitations to compositions of matter, or other specific biological components, are the sorts of problematic claims that have been asserted (e.g. the broadest Housey and Classen claims).

    I also agree that patent practitioners (attorneys and agents) have a duty to try to get the broadest possible claims for clients. Perhaps that is how these scenarios start, with the best of intentions on all sides. But as I pointed out above, the very general way in which these broad claims are worded makes it difficult (but not impossible) to search for potentially invalidating art. So the patent practitioner misses the art that would necessitate greater limitation of the claims, perhaps believing that the examination process will turn up any relevant art, but examiners do not typically have the time or resources to find the critical art for these sorts of claims. The result is, sadly, that the inventor and any assignees may well end up with an inflated belief in the value of the broadest claims that have issued – and during future prosecution when licensing revenue is on the line, will continue to push for overbroad claims.

    Sure, every organization that is approached by a hopeful licensor may object to the necessity of taking the license, or the amount that is being sought. But I know from direct personal experience that there is a distinct difference in how target licensees view broad claims that are well supported and are NOT apparently or demonstrably overbroad, and how those same licensees view demonstrably overbroad claims. (And this is a key point: the most important thing is not whether the claims are being asserted by an NPE or not, it’s whether they are perceived to have any value.) Targeted licensees often have research staff who, based on their extensive experience in the field, will immediately know about possibly invalidating art; they have the financial resources; and most importantly they have the financial incentive to find such art. The result is that the targeted licensee will know at some point as an ‘objective’ fact that the claims are overbroad and invalid, but the hopeful licensor will not.

    This is the disconnect in valuation of the claims that I referred to above.

    The second prong of my definition of troll-like behavior, the aggressive assertion of the demonstrably overbroad claims, comes into play here. When the hopeful licensor begins to get push-back from target licensees – to the effect that the target licensee strongly believes their broadest claims be invalid – does the hopeful licensor give up, or look harder for the relevant art to initiate a reexamination, or reissue their patent with narrower claims? Patent trolls will not do any of those things, but instead will continue to seek licensees and even initiate litigation. These choices and behaviors are objective matters of fact.

    How can we remove the disconnect by getting the relevant art information to applicant and examiners, so that claims of appropriate breadth will issue from initial prosecution or reexamination? (The target licensees that are most likely to know about the relevant art often choose not to disclose what it is, because of the uncertainties of ex parte procedures and the estoppels of inter partes reexamination.) Is it up to third parties who don’t have any litigation exposure? Would a more generous version of 37 CFR 1.99 – with a longer time-frame for submitting art and the ability to submit explanations – help?

  • [Avatar for Blind Dogma]
    Blind Dogma
    April 28, 2011 03:04 pm

    Patent law does not deal with “value” in a monetary sense as can be seen by the fact that no profit is legislated for the patent right. You are awarded a property right to do with as you see fit. And yes, much to the chagrin of those tainted with sight-robbing dogma, that right includes the ability to simply sit on your right and do nothing except the only thing that a patent right entails one to do: stop others.

    Likewise, aggessively looking to maximize the licensing power of your property is an entirely legal activity. There is nothing illegal in being aggressive per se.

    Unless you want to universally change the law and how it deals with property, then you are on a fool’s errand to even attempt to enforce some type of “correction” on the right based on who later owns the property or how they (still legally) try to enforce the property. There is no “disconnect” because any “connect” is based on fallacy and somebody else’s perception of how one should act with one’s property.

    Labelling one a “troll” should be seen as what it is – a ploy, a phsychological tool used to demonize a perfectly legal and legitimate exercise of fundamental ownership of property.

    To then ignore the thicket busting activity of which “trolls” are capable is to entertain a perversity of confusing benefit with evil. The disarming of a “patent nuclear threat” is only disabling to those who only seek patents to be able to engage in such nuclear blackmail. And yet (not incoincidently), the nuclear blackmailists are the prime generators and instigators of the use of the “troll” term. It is with no small sense of irony that I see programmers by the legion drink the Kool Aid of such as Micro$oft and repeat with surprisingly little actual critical thinking that patents are evil – as evidenced by “those nasty little trolls.” How many actual programmers are (not would in some polly-anna imaginary world) willing to work for free, to freely dedicate their efforts to the Corp so that the Corp can make an even bigger profit? The only ones that fall into this category are the self-owned startups – the ones most likely to have positive views of patents, the ones who do not drink the Kool-Aid.

  • [Avatar for American Cowboy]
    American Cowboy
    April 28, 2011 10:56 am

    Sprunger’s core issue is “the disconnect between the value of the patents and the aggressiveness of the behavior.” Value, agressiveness and disconnect all sound pretty subjective to me.

    Who gets to be the judge of whether these are met? What standards does he/she/it use?

    “Patent trolls, as defined by the above behaviors, are hated by their targets largely because of the perceived worthlessness of the trolls’ patent claims…” I don’t recall ever encountering a defendant who thought the plaintiff’s claim was any good or worth what the plaintiff was asking for for peace. That’s why you litigate: because the parties don’t agree. If you diminish the plaintiff’s right to litigate these claims (and get an injunction if he/she/it wins) you skew the negotitaions in the infringer’s favor.

  • [Avatar for Michael Risch]
    Michael Risch
    April 27, 2011 08:19 pm

    1. I am with you on the overreaching. Indeed, see this blog post I put up a couple weeks ago:

    2. Phase II of this study will be patent quality, and I will do more than any study in the past by looking at exactly how any patent was invalidated. This will tell us more than we have known before. I also hope to somehow determine litigation behavior, but that may be tougher.

    3. Even so, there are clues in the current article, if you haven’t downloaded the whole thing. Clues include number of continuations, number of claims, time to assertion (the longer, the more likely it is something general covering something specific), and the number of individuals.

    4. That said, I’m not with you on the generalization about motives at the time of patenting. I don’t know a single patent lawyer who believes they have done their job if they haven’t at least tried to get the broadest, most general patent claims they can, including by amending to add claims that cover intervening competitive products. This goes from the individual level to the largest corporation. Remember that the so called “hyperlinking” patent that was so overreaching was issued to British Telecom, and not because their motives were unpure. I think that’s why the patent bar generally bristles at things like reducing the number of continuations. Thus, in my view, all one can really say is that there are lots of overbroad patents and overreaching by plaintiffs on underbroad claims, and that whether the plaintiff is an NPE is kind of beside the point. And that winds up being one of the takeaways from this study – NPE patents look a lot like other litigated patents, and how we feel about them should be similar to how we feel about other litigated patents.

  • [Avatar for Suzanne A. Sprunger]
    Suzanne A. Sprunger
    April 27, 2011 06:36 pm

    Thank you for providing some data regarding NPEs. However, I wonder whether it would be more useful in these analyses to focus on the undesirable troll-like BEHAVIOR itself, and factors that allow such behavior to occur, rather than the organizational structure or business model of the perpetrators.

    I would define the characteristic behaviors of the patent troll as (1) obtaining patents with overbroad claims expressed using generalized terminology, and (2) seeking licensing revenues through aggressive and continued threats to enforce said overbroad patents, optionally including litigation.

    This troll-like behavior can be exhibited by ANY type of entity, and that’s one reason I prefer looking at the disconnect between the value of the patents and the aggressiveness of the behavior. The association between troll-like behavior and NPEs may have arisen only because ‘pure’ NPEs have more freedom to continue aggressive license-seeking campaigns indefinitely, since they would never need to develop cooperative industry relationships (cross-licensing, joint ventures or marketing agreements, etc.).

    Patent trolls, as defined by the above behaviors, are hated by their targets largely because of the perceived worthlessness of the trolls’ patent claims, and that’s why it’s a key characteristic in my definition of a troll. Who wants to pay off a troll (i.e. license their patents), not to get anything of value, but only to stop a nuisance? It should be simple to invalidate overbroad claims, but paradoxically, the more general the terms used in a claim, the harder it can be to find invalidating art. Some examples of claim wording of this type can be found in litigated patents asserted by: Housey (e.g. US 4,980,281), Classen (e.g. US 5,723,283), and Alice Corp. (e.g. US 6,912,510).

    It’s true that this way of looking at patent trolls requires a more detailed analysis of the words and value of the claims, and is much easier to carry out in retrospect, after claims have been invalidated in litigation. But there may be some clues from looking at complete assignment data that would suggest how these troll-like enforcement scenarios arise.

    For example, an interesting question is whether the assertion of such claims results more often from (1) individual inventors (e.g. Housey and Classen), who push for arguably overbroad claims with an assumed purpose of going after licensing revenues, or from (2) issuance of overbroad patents to assignees who do not choose to enforce them, but transfer them to other entities who wait until the market is ‘ripe’ and then start the hunt. In the third point of your column, you conclude that the long average time between patent issuance and the initiation of litigation is due to the latter scenario. However, that time delay could simply be from the length of the campaign to enlist licensees prior to resorting to more expensive litigation: patent trolls do sometimes succeed in obtaining licensing revenue through sheer persistence over a course of years, and some need to accumulate multiple licensees and build up a ‘war chest’ before embarking on litigation.

  • [Avatar for Michael Risch]
    Michael Risch
    April 27, 2011 04:40 pm

    “Relying on USPTO Assignment recordings is not a very reliable way of finding who actually currently owns patents at the time they are sued on, because it is not a mandatory system, even for suits, and has no significant benefit under 35 USC 261 in most cases.”

    That’s not what I did. Others have done that, and I agree with you… I did track assignments so I could see how long it took for those that were recorded to get assigned, but the records aren’t much help after that.

    Chris: Yes, I looked that company business plans – we didn’t have a lot that turned into licensing entities – most either were at the outset or didn’t become one. I think licensing entities were considered operational, though I can’t be sure of that. Either way, the number would change by maybe 1 or 2 at most.

  • [Avatar for Paul F. Morgan]
    Paul F. Morgan
    April 27, 2011 04:15 pm

    Relying on USPTO Assignment recordings is not a very reliable way of finding who actually currently owns patents at the time they are sued on, because it is not a mandatory system, even for suits, and has no significant benefit under 35 USC 261 in most cases.

  • [Avatar for American Cowboy]
    American Cowboy
    April 27, 2011 01:25 pm

    A decade or so ago it was fashionable for companies to go find the Rembrandts in their attics to sell or license. Apparently some of them became owned by NPE’s.

    Sell them your unused patent and them call them patent trolls. How elegant!

  • [Avatar for Chris]
    April 27, 2011 08:29 am

    Hello Michael,
    I appreciate your work here. In looking at failed companies did you distinguish from those not failed those who were no longer working to their initial business plan? For example, Microunity set out to create the great mediaprocessor chip, but now only licenses patents, having let go all the engineering, sales, marketing, … and retained the founders. Patriot Semiconductor, while still playing at product development, has followed Microunity and focuses mostly in the area licensing patents. These two are examples of companies not defunct but not doing what they set out to do.
    Thanks for the research.

  • [Avatar for Ben Hoyle]
    Ben Hoyle
    April 27, 2011 08:07 am

    Great to see some real evidence on this issue.

    Often various assertions are thrown around, both for and against NPEs or the patent system, without any supporting analysis.

  • [Avatar for Michael]
    April 27, 2011 07:45 am

    Nice work! I’m going to enjoy absorbing this study…