Are NPE’s the New Patent Plutonomies?

Recently we blogged about Patent Plutonomies. The expression was coined following Ajay Kapur, (former) global strategist at Citigroup, who described countries which are defined by massive income and wealth inequality as “Plutonomies”. Translated into IPR, especially to the patent system, “Patent Plutonomy” refers to an IP world where only a few know how to play the system and to generate reasonable revenues, while the majority is – or just feels – overcharged. A recent study by PriceWaterhouseCoopers shows that NPEs seem to be the profiteers of the current IPR System.

The PriceWaterhouseCoopers 2009 Patent Litigation Study shows that NPEs (non-practicing entities or patent trolls) heavily outperform practicing entities (or operating companies, which actually design, manufacture or distribute patent protected products) in generating damages from suing alleged patent infringers. According to the study, damages awards for NPEs have averaged more than double those for practicing entities since 1995 while the median damages for practicing entities declines by 30 percent in the same period. Unfortunately, the study does not provide an explanation for this phenomenon.

Nevertheless, the preface of the study draws attention to the changing environment for monetizing patents since 2006. These changes could be a starting point for analyzing some of the reasons of the study’s empirical results. Anyway, they are worth to mention and to interconnect with the particular result:

Since the eBay v. MercExchange judgment of the US Supreme Court in 2006 we have much higher thresholds for receiving injunctions (the four-factor-test, i.e. “A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for the injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be deserved by a permanent injunction”). We have also seen some decisions that have considerably increased the thresholds for getting and enforcing patents (e.g. the enhanced concept of non-obviousness from KSR International v. Teleflex, a clarified principle of “patent exhaustion” from Quantas Computer v. LG Electronics, and last but not least the just questioned patentability of business methods, In re Bilski).

This results in a significant increase in patent quality, at least concerning those patents that have been enforced judicially (and prospectively will be enforced within the next years). Therefore, we cannot see NPEs on the top of any “Patent Plutonomy” where they profit most of the current system while overcharging the rest of the patent society. We have to acknowledge another important function of exploiting patents by just licensing them: Before licensing there is choosing and valuating technology. That is the main task of an NPE. And, according to the study, they obviously have had a great success in identifying remunerative technologies.

Stephan Dorn