A Response to PWC’s "Starry-Eyed" View of the Value of Litigation as Effective Way to Monetize Patents

rose colored glassesI recently became aware of this patent litigation analysis prepared by PriceWaterhouseCoopers (“PWC”) (hat tip: Marcus Malek of the Intangitopia blog). The report appears to be rigorously prepared from data obtained from a large number of reported patent litigation cases dating from 1995. I read this report with interest and think that anyone who is interested in the ROI of patent enforcement should read it also. The data provide a wealth of information for anyone even thinking about bringing a patent case or who is involved in defending against claims of patent infringement.

Although the data in the PWC provides informational value, I nonetheless have a big problem with the following assertion that is prominently presented on page 18 under the title “What This Means for Your Business”:

“In light of the findings in this study, patent litigation appears to continue to be an effective protection and monetization path for patent holders.” (emphasis added)

This unqualified statement gets a big “WHAT?!” from me.

The PWC data indicates that patent holders prevail only 37 % of the time, with the breakdown of wins being 19 % at summary judgment and 57 % at trial. (page 8) The median damage award for patent holders is $3.8MM, measured over 7 years from 2001 to 2007 (page 2). Notably, the median damage award varies substantially among technology areas, with some areas such as pharmaceuticals, consumer goods and automotive resulting in damage awards significantly lower than the median value. (p 3) The values are further skewed because the award figures include the $1.5 B award against Microsoft that was later markedly reduced (but was current as of the time of the PWC report).

While the $3.8MM figure might initially seem somewhat impressive to many patent owners, notably missing from PWC’s assertion that patent litigation is an “effective [] monetization path” is the cost to the patent holder to obtain that median damage award of $3.8 MM. At best, this assertion presents a “starry eyed” view of how patent owners can extract value from their patent assets. At worst, the assertion is misleading. (But, in any event, it is not necessarily surprising because PWC derives significant revenue from patent litigation.)

With regard to these costs, recent estimates of the cost of fairly non-complex patent litigation through trial is about $5 MM for each party. This means that a prevailing plaintiff will likely spend significantly more to obtain its award than it will ever receive. Moreover, the PWC report does not appear to indicate that a patent owner that loses at trial is likely to obtain a higher damage award, even after undertaking the additional substantial expense of appealing an adverse decision.

And, it is not just actual cost that the prevailing plaintiff owner will incur in the process of winning its patent lawsuit. The median time to trial, as measured from 1995 to 2007, is stated to be just slightly over 2 years. (page 11) This delay means that during the pendency of the lawsuit, a patent plaintiff’s business, technical and legal staff will be diverted from tasks that are likely to bring substantially more concrete revenue into the company today and in the future than that which might be obtained by a litigation win. The opportunity costs of the patent owner’s favoring of litigation over more reality-based revenue generation opportunities can thus be substantial and should not be overlooked.

Taken as a whole, I do not see how the PWC data show that patent litigation is an “effective [] monetization” strategy as contended by this report, especially when chances are that a patent owner will spend more on the litigation–both in actual dollars spent and in opportunity costs–than it will likely obtain in a damages award.

This is not to say that I am totally against patent litigation in the proper circumstances. Countless situations certainly exist where it makes sense for a patent owner to enforce its rights in a court of law. There are also many good examples of where patent owners have won substantial damage awards against an infringer. However, the PWC data show that the median damage award is actually fairly modest in most industries, especially given the high cost generally involved in conducting patent litigation.

So, unlike PWC, I do not believe that patent litigation is a good bet for patent owners to monetize their patents. Rather, it seems more like a crap shoot to me. But I do not make my living from patent litigation anymore, which may “cloud” my perspective that litigation should be perceived as a source of revenue generation. In summary, I think there much better ways for a patent holder to view the value provided by patents.

UPDATE: After posting, I realized that a clarification was needed in regards to patent monetization as a business model. Of course, for non-practicing entities (aka “patent trolls”), patent litigation may not only be a viable strategy, it might be the only strategy. Nonetheless, NPEs certainly do not form the core of PWC’s client base. I therefore concluded that PWC’s report is directed toward leaders of the corporations that it counsels, not NPEs. For corporate-type patent owners, patent litigation is not a viable patent monetization strategy for the reasons set forth in this post.

One thought on “A Response to PWC’s "Starry-Eyed" View of the Value of Litigation as Effective Way to Monetize Patents

  1. FOARP

    Of course, if you were to turn this on its head and say that obtaining licenses through the threat of litigation is an effective way of making money, this would be a whole other issue. It is the very fact that litigation is such a dubious and expensive way of settling things that leads people to obtain a licence rather than risk it. My former employers made thousands of patent applications in the US every year with exactly this intention.

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