Threat of Litigation and Patent Value: What Technology Managers Should Know

By Tekic, Zeljko; Kukolj, Dragan | Research-Technology Management, March/April 2013 | Go to article overview

Threat of Litigation and Patent Value: What Technology Managers Should Know


Tekic, Zeljko, Kukolj, Dragan, Research-Technology Management


Under the strategy employed by patent dealers, patent value is driven by the threat of litigation-the higher the threat of litigation, the greater the monetary value of the patent.

OVERVIEW: Patent dealers have achieved exceptional growth in scale and scope of operations; today, their approaches to patent value affect intellectual property strategies for companies in many industries, even beyond the high-technology sector. To clarify the strategy patent dealers use, we studied a set of 392 U.S. patents sold to a patent dealer by a global consumer electronics firm; the dealer then sold the patents during 2010 and 2011. The analysis shows that under the strategy employed by patent dealers, patent value is driven by the threat of litigation-the higher the threat of litigation, the greater the monetary value of the patent. The evidence suggests that broadly drafted, older patents that cover mainstream technology and for which evidence of infringement may be ambiguous present a greater threat of litigation, and therefore carry a higher value.

KEYWORDS: Intellectual property , Patent value , Patent dealers

Historically, patents have been deployed primarily in the service of two fundamental strategic purposes: to sustain exclusion rights ( Cohen, Nelson, and Walsh 2000 ) or to form the basis for cross-licensing negotiations with competitors ( Hall and Ziedonis 2001 ). The chemistry and pharmaceutical industries, for instance, have relied on patents to exclude others from using patented technologies, providing a period of monopoly and an opportunity for extra profit. In contrast, firms in complex product industries, such as telecommunications, semiconductors, or consumer electronics, have generally patented with a view to identifying opportunities for cross-licensing, which is crucial in these sectors ( Hall and Ziedonis 2001 ).

However, in the beginning of the twenty-first century, nonproducing patent dealers (for instance, Intellectual Ventures, Rembrandt IP, Acacia Technologies) have played a growing role in the high-technology market. Their impact has reached an exceptional scale and scope, so that they affect companies of all sizes in many industries, beyond the high-technology sector (PatentFreedom 2012). These new players in the market have accelerated transactions between patent owners and patent users, using the threat of litigation as a main motivator for exchange ( Detkin 2007 ; McDonough 2007 ; Reitzig, Henkel, and Heath 2007 ). Essentially, these dealers encourage firms to license or purchase rights to patented technology by threatening to sue for infringement. Because these new entities do not make or sell products, their entry into the IP marketplace threatens to upend the competitive system in industries where they operate ( Rivette and Kline 2000 ).

Although the strategy of threatening with litigation is not a recent development, to the best of our knowledge, there are no quantitative studies determining the strategy's effect on patent values. In large part, this is because the patent market is not transparent and exact data about patent monetization has not been available to researchers. This study, which uses empirical evidence of patent value gathered from a patent dealer, will help close that gap. Using a unique dataset of dealer value assessments and other evaluations for 392 U.S. patents sold to the dealer by a major consumer electronics firm, we were able to demonstrate quantitatively that the threat of litigation was the main driver of value in that patent marketplace. We were also able to outline a profile of patents most likely to create a high threat of litigation-and thus most likely to accrue high value.

Patent Dealers and Their Effect on Patent Values

Patent dealers have a mixed reputation; they are sometimes seen as aggregators and patent distributors, sometimes as "trolls" or "sharks" ( Detkin 2007 ; Millien and Laurie 2007 ). They are a diverse group, employing any of a number of heterogeneous business models ( Millien and Laurie 2007 ).

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Threat of Litigation and Patent Value: What Technology Managers Should Know
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