Guest post by James Bessen, Boston University School of Law and Berkman Center for Internet and Society, Harvard, and Michael J. Meurer, Boston University School of Law
As Congress considers the SHIELD Act, it is helpful to review some of the empirical evidence on the economics Patent Assertion Entities (PAEs). Following up on Colleen Chien’s recent post (Patent Trolls by the Numbers), this post looks briefly at data on the 10 publicly listed firms that were predominantly in the patent assertion business during the period from 2005 to 2010 (Acacia, Asure, Interdigital, Mosaid, Network-1, OPTi, Rambus, Tessera, Virnetx, and Wi-Lan). These companies accounted for about one sixth of all PAE lawsuits filed during this period. Although these companies might not represent the entire universe of PAEs, the greater amount of available financial information helps paint a rich picture of their business. We explored three questions:
1. How much licensing revenue do PAEs get per company sued?
We matched these patent trolls to the lawsuits filed listed in Patent Freedom’s database of patent trolls (see our paper The Private and Social Costs of Patent Trolls for details on this database and the matching). During the period from 2005 through 2010, licensing revenues totaled nearly $6 billion. The mean licensing revenue per defendant comes to $3.8 million in 2010 dollars. This figure includes licensing revenues from non-litigated patent assertions. But it understates the magnitude of licensing revenues per suit because it does not account for accruals — much of the revenue from lawsuits filed in 2010 was not collected in 2010 (and there were many more lawsuits in 2010 than in earlier years). Overall, this figure corresponds rather well with survey-based estimates in our paper The Direct Costs of NPE Disputes.
2. How does revenue vary with PAE business model?
We identified three different types of business models: “middlemen” who acquire or license patents from third party inventors (e.g., Acacia), “R&D-based” who conduct R&D and file their own patents (e.g., Rambus), and “salvage” where an operating company becomes a PAE using patents it developed for its own business (e.g., Asure / Forgent). The R&D-based PAEs file fewer lawsuits, but their licensing revenues are much greater. The R&D-based PAEs account for only 6% of the lawsuits, but 83% of the revenues, earning $54 million per defendant. The “middlemen” file 80% of the lawsuits, but earn only $0.7 million per defendant. These wide disparities correspond to other evidence about the high heterogeneity of PAEs and licensing outcomes.
3. How much of the licensing revenue flows to inventors?
Using the firm’s 10-K reports, we estimated the flows of funds to third party inventors as royalties and as patent acquisitions, as well as the flows to PAE’s own R&D departments including capitalized development costs when the PAE exited an operating business. Of the total licensing revenues earned, only 7% flowed to third party inventors. If we look at just the “middlemen” PAEs, 31% of the licensing revenues flow to third party inventors. If we include own R&D in the whole sample of PAEs, total flows to inventors of all types come to 26% of licensing revenues. These numbers suggest that on the whole, not much of the revenue received by publicly listed PAEs ends up supporting independent inventors. They also suggest that most of the licensing revenues are consumed as transaction cost, even for the “middlemen” PAEs.
James Bessen is a former software innovator and an economist studying innovation; Michael J. Meurer is an economist and law professor. Bessen and Meurer wrote Patent Failure, an economic analysis of the performance of the US patent system in 2008 (Princeton University Press).