Return to Assertion Value Series: The 1% Patent

“Many believe the root cause of the patent system’s dysfunction is that the U.S. Patent and Trademark Office [USPTO] is issuing too many invalid patents that unnecessarily drain consumer welfare, stunt productive research, and unreasonably extract rents from innovators.” (emphasis added)

That quote from Professors Michael Frakes and Melissa F. Wasserman echoes a common complaint in patent policy conversations. The USPTO is widely perceived as issuing too many bad patents.

Moreover, this complaint is understandable if one focuses on patents that are challenged in legal tribunals such as federal district court, the International Trade Commission (ITC), or the Patent Trial and Appeal Board (PTAB). But, as Mark Lemley has pointed out, this is just a tiny, tiny fraction of all issued patents:

“So why in the world am I optimistic about the patent system? The answer has to do with the case of the missing patents. There are over 160,000 new patents issued every year. Where do they go? Well, some of them get litigated, but despite the dramatic increase in the numbers of litigation, we’re talking there about maybe 1,000 to 2,000 lawsuits a year. We’re talking about maybe one percent of all actual patents ever being litigated. So, the focus of the patent law system, which has been on patent litigation, is actually directed to only a tiny subset of those patents. There are other patents that get licensed in negotiated transactions but never go to litigation, of course. That increases the number beyond one percent, but at most it raises the number to two or three percent. We’re still talking about only a tiny percentage of all patents.”

Nor is this tiny, tiny fraction representative of the remaining issued patents, so statistics cannot be extrapolated from this tiny fraction onto the rest. In this manner, headlines about the rate of bad patents can be extremely misleading, if they are only based on the tiny fraction of litigated patents.

Indeed, one of the biggest challenges in patent valuation is the lack of data: most patents are not meaningfully licensed and, even when they are, those licensing agreements are typically confidential. From this perspective, focusing on the 2% of litigated patents because that’s where we have data is analogous to searching for your keys underneath the streetlight, because that’s where the light is.

I’d like to provide an alternative perspective. As an experienced patent lawyer who has obtained many hundreds of patents for clients over almost two decades, I would suggest that the root cause of the patent system’s shortcomings is, if anything, the opposite: the USPTO issues too many patents that are valid while nevertheless having zero assertion value. In other words, if you zoom out and look at the statistics for all issued patents—not just those challenged in legal proceedings—then the more common problem is that patents often issue with claims that are so narrow or commercially unimportant that they never become infringed. Moreover, there are so many of these narrow patents that, even if the economic cost of one is small, in aggregate the economic costs become comparable to, or greater than, the economic costs associated with patents invalidated in a legal proceeding.

Tiny Fences

An analogy helps to make the point. If we zoom out to look at all issued patents, then the most common problem, or even the most important problem, is not that there are some wide-but-invalid fences around popular territory. The problem is that most patents draw tiny fences around territory that never becomes popular. In other words, these patents are locking up family jewels even when nobody is trying to steal them.

From a higher level perspective, the invalid patents that Professors Frakes and Wasserman are complaining about are arguably less than 1% of all issued patents. Even if we multiplied that error rate by ten, resulting in a 10% error rate, the remaining 90% still deserves an A for the USPTO. This is a reason to show the agency some respect and sympathy after considering the Herculean size and difficulty of its mission.

I’m speaking from personal experience, but please don’t just take my word for it. Here are some quotes to support my thesis (those without source links were provided to me directly):

• “One percent of the patents in a portfolio drives the value of the entire portfolio.” – Andrew Godsey, Global Technology Transfer Group
• “Most patent experts agree, however, that over 90% to 95% of patents carry little to no value because they are not being utilized in the marketplace.” – Matt Moyers, Peak Value IP
• “The vast majority of U.S. patents pass their lives in complete idleness, gathering dust, rather than revenues.” – Law Professors Polk and Gideon Parchomovsky
• “First, the so called ‘bad patents’ are gone; nowadays, there are so many ways to invalidate an issued patent that no one in their right mind would want to enforce their rights with anything but the highest pedigree assets where indisputable validity, strong infringement theory and substantial damages must be assumed. The flip side to this; only a minuscule percentage (way less than 1%) can meet this very high bar and the smallest blunder in drafting (e.g. “a” vs “the” in a claim) or during prosecution can be fatal, leaving absolutely no margin for error.” – Louis Carbonneau, Tangible IP
• “98%” – the percent of offers from patent owners to secure litigation financing that GLS Capital turns down – Adam Gill, GLS Capital

Don’t Panic

Now, some readers might hear these statistics and find them alarming. Please don’t worry. There are perfectly good and rational reasons why so many patents have zero assertion value. First, the USPTO’s job is to ensure that only brand new things get patented. If we’re only patenting brand new things, then it’s not surprising that, after a patent issues, the marketplace is not overflowing with infringement. Not everything becomes popular; achieving popularity takes significant time; and this is impossible to predict perfectly in advance.

Moreover, there are good and rational reasons to get a patent without ever asserting the patent. Decades ago, Professor Long at Columbia University explained that rational companies can spend millions of dollars securing patent as “signals”[1] that can significantly improve share price—regardless of whether the underlying patents will be enforced or even can be enforced. Similarly, in his article on venture capital, Professor Lemley documented many different non-traditional reasons to secure a patent, and he highlighted these as his justification for being “optimistic” about the patent system.

Heavy Skew

In summary, there is a heavy skew in patent valuation: a tiny fraction of all patents drives the assertion value of their portfolios, and the remaining patents provide little, if any, assertion value. In other words, patent valuation follows a power curve rather than a normal curve. We can call the top patents that drive portfolio value “1% patents” and the rest “99% patents.”

The fact that patent valuation follows this power curve has many deep and interesting implications. First, it suggests that when a patent turns out to be a 99% patent rather than a 1% patent, then this is not the end of the world, and in some ways it is routine. Second, as Professor Lemley has repeatedly observed, it suggests that the patent system has some resilience against legal changes that reduce the assertion value of patents. Even when Congress and the Supreme Court wipe out a trillion dollars’ worth of patent value, companies continue to buy them in bulk.

Third, the heavy skew in patent valuation is a cautionary note for our profession. The 1% number is so low that it would likely be healthy to increase it. Why should 1% of the patents in a portfolio, like Atlas, bear the entire weight of the portfolio? It would be interesting to consider the direction of change in this number over time: were 1% of patents always driving the entire value of their portfolios? A century ago, was the number higher or lower? Our profession doesn’t want the number to drop to zero.

Preventing ‘Unforced Errors’

Fourth, and most importantly, the heavy skew in patent valuation suggests that there is room for improvement. Although there are many reasons to not worry about the heavy skew in patent valuation, including those outlined above (e.g., signaling), it must still be true that at least some of these unenforceable patents are avoidable. In tennis terms, they are unforced errors. In upcoming articles, I’ll explore reasons why these unforced errors happen and consider ways to help prevent them from occurring. I will not advocate for major surgery to the patent system, because I think that such major surgery is neither necessary nor desirable. Nevertheless, I want to highlight all of the ways that patents, as financial assets, can become weaker than they appear at first, and I want to suggest several ways to harden those assets. To the extent that Congress and the Supreme Court have beaten up on patents, what can the patent bar do to strengthen and reinvigorate them? As a profession, how can we focus on 1% patents and create more of them? Can we double the 1% number or watch it shrink to 0%?

This is the silver lining to the heavy skew in patent valuation: even if you do nothing more than increase the rate of enforceable patents from 1% to 2% in a given portfolio, the overall value of that portfolio will still double.

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Author: Supertrooper
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