Academic journal article Research-Technology Management

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

Academic journal article Research-Technology Management

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

Article excerpt

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, non-producing 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). However, they all have in common one characteristic: they do not produce goods, but instead earn revenue by deploying their intellectual property, whether internally created or acquired (Yanagisawa and Guellec 2009). In other words, patent dealers make money by aggressively identifying infringe-meat and persuading infringers that paying licensing fees or even buying the patent is the only way to avoid expensive, time-consuming litigation.

The playing field has changed for intellectual property as patent dealers have emerged as market intermediaries. Like chess grandmaster Aron Nimzowitsch, patent dealers know that "the threat is stronger than the execution"; (1) after sending the first cease-and-desist letter, they will let the threat of litigation create new advantages and a possibility of an out-of-court settlement. PatentFreedom (2012) reports that companies in many industries have been targeted by patent dealers. In 2011, 2,150 companies were engaged in 5,842 lawsuits involving patent dealers, incurring about $29 billion in direct costs (2) (Bessen and Meurer 2012). …

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