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Bombshell Study: Heavily Litigated NPE Patents Overwhelmingly Lose at Trial

By Peter Zura

To date, litigated patents were viewed as "strong" patents - the types that defendants were supposed to avoid taking to trial.  Moreover, litigated patents were seen as more valuable, since they managed to survive an all-out attack on validity by a presumably well-financed defendant.  Earlier studies (John  R.  Allison  et  al.,  Valuable  Patents,  92  Geo.  L.J.  435  (2004)) looked at litigated patents, and found that they differed from non-litigated patents in that they (1) include more claims, (2) cite more prior art, (3) are cited more often by later patents, and (4) come from larger "families" of patents/continuations.  Each of these factors are now used in conventional methodologies to determine the private value of patents.

John Allison, Mark Lemley and Joshua Walker recently took on the task of identifying every patent that was litigated eight or more times between 2000 and February 2009, including cases still pending, and compared the outcomes of the cases against patents that were litigated only once.  In the course of their analysis, they found 106 such patents, which have been litigated in a total of 2,987 different patent assertions in 478 different cases, often against multiple defendants.

What did they find?  Serial patent litigants, and particularly NPE's (aka "trolls"), for a lack of a better phrase, "get creamed" when they go to trial:

[T]o  our  great  surprise,  we  find  that  the  willingness  of  these  patentees  to  litigate  their cases  to  judgment  is  a  mistake.  Far  from  being  stronger  than  other  litigated  patents,  the most-­-litigated  patents  that  go  to  judgment  are  far  more  likely  to  be  held  invalid  or  not infringed.  The  differences  are  dramatic.  Once-­litigated  patents  win  in  court  almost  50% of  the  time,  while  the  most-­litigated  ?  and  putatively  most  valuable  ?  patents  win  in court  only  10.7%  of  the  time.

The  results  are  equally  striking  for  patents  owned  by  non-­practicing  entities  (NPEs), and for  software  patents.  NPEs  and  software  patentees  overwhelmingly  lose  their  cases, even with  patents  that  they  litigate  again  and  again.  Software  patentees  win  only  12.9%  of their  cases,  while  NPEs  win  only  9.2%.

[S]tatistical  tests  bear  this  out.  We  compare  the  proportion  of  win  rates,  testing  the  null  hypothesis that  there  is  no  difference  between  the  most-­litigated  and  once-­litigated  patent  outcomes.  We test  the  proportions  in  several  ways,  both  including  and  excluding  settlements  in  the  denominator  of decided  cases,  and  both  including  and  excluding  default  judgments  as  plaintiff  wins.  No  matter  which test  we  use,  the  differences  are  highly  statistically  significant  ?  the  most-­litigated  patentees  were more  likely  to  lose.   

 Considering  only  the  patents  themselves,  the  proportions  of  initial  ownership  by  large  and  small  entities  are  almost  equal  in  the  most-­  and  once-litigated  data  sets:  53.5%  of  most-­litigated  patents  and  47.8%  of  once-litigated  patents  were  issued  to  large  entities.  The  picture  is  quite  different,  however,  when  one  looks  at  the  proportion  of  actual  assertions  in  litigation,  where  large  entities  account  for  a  surprisingly  small  percentage  of  the  most-­litigated  patents.  Because  small  entities  are  disproportionately  represented  in  the  actual  litigation  of  most-­litigated  patents . . . patents  that  were  initially  issued  to  large  entities  represent  only  22.4%  of  the  assertions  in  the  most-­litigated  group,  compared  to  47.8%  of  the  once-­litigated  group.

[W]hen  the  cases  do  not  settle,  large  patent  plaintiffs  are  significantly  more  likely  than  small  ones  to  win,  without  regard  to  how  the  data  are  sliced.  When  we  combine  the  two  data  sets,  large  entity  plaintiffs  win  53.1%  of  the  cases  decided  on  the  merits  (55.9%  if  default  judgments  are  included),  while  small  entity  plaintiffs  win  only  12.3%  of  their  cases  (23.1%  if  default  judgments  are  included).

We  designed  this  study  to  explore  the  effects  of  repeat  play  on  litigation  behavior,  contributing  to  a  literature  on  the  economics  of  civil  procedure  as  well  as  the  substance  of  patent  law.  But  what  we  found  was  dramatic  and  unexpected:  The  patents  and  patentees  that  occupy  the  most  time  and  attention  in  court  and  in  public  policy  debates  ?  the  very  patents  that  economists  consider  the  most  valuable  ?  are  astonishingly  weak.  Non-­practicing  entities  and  software  patentees  almost  never  win  their  cases.  That  may  be  a  good  thing,  if  you  believe  that  most  software  patents  are  bad  or  that  NPEs  are  bad  for  society.  But  it  certainly  means  that  the  patent  system  is  wasting  more  of  its  time  than  expected  dealing  with  weak  patents.  And  it  also  suggests  that  both  our  measures  of  patent  value  and  our  theories  of  litigation  behavior  need  some  serious  reconsideration. 

Full post as published by Two-Seventy-One Patent Blog on September 23, 2010 (boomark / email).