Unlocking the black box of NPE risk

01-10-2015

Paul Scola

Gauging NPE-related risk is becoming increasingly easy to do, particularly as the associated costs of troll behaviour are better understood. Paul Scola of RPX Corporation reports.

In the last issue of World IP Review I discussed the opaque nature of non-practising entity (NPE) risk. Because ‘patent trolls’ use litigation to pressure companies into paying licences, the costs associated with the risk—legal fees and settlements—have been shrouded in secrecy, making it impossible to accurately underwrite and price NPE insurance.

RPX began changing this paradigm nearly eight years ago when we formed a defensive patent acquisition network that established the company as a trusted intermediary for 225 clients. While executing thousands of patent acquisitions we have been compiling a trove of confidential (and anonymous) data from a broad group of defendant companies.

This data is the foundation of the actuarial models that drive our insurance offerings. As with all successful underwriting methodologies, ours is a combination of quantitative data and qualitative assessment. 

Quantitative data

As one of the world’s largest buyers of patents, RPX sees nearly all the patents that are made publicly available for sale (as well as many that are offered privately). The patents we buy, of course, are cleared from the market and do not have any associated litigation costs. Those we don’t acquire, however, become a source of cost and risk when they are bought by NPEs. When those patents are asserted and/or litigated we correlate them with cost data provided by defendants that are RPX clients or other companies that participate in our annual NPE cost report.

This allows us to determine how much those same assets ultimately cost defendants in legal fees and settlements (see Chart 1). It also helps us estimate the NPE-related costs of various kinds of patents with a high degree of specificity, while giving the actuarial model a detailed view of how those costs break down by length of suit, timing of settlement, specific NPE, size/type of defendant, and more. 

RPX also acquires patent rights out of active litigations, so we can corroborate the data we glean from our clients and/or cost study participants with our own first-hand information on the licence rates of different kinds of patents (and the legal expense required to achieve those settlements). We also gather detailed cost data from prospective insurance clients, who share historical litigation and settlement costs in their policy applications.

rpx-npe-costs.jpg

Qualitative attributes

Not all patents, nor all NPEs, are created equal. Well-written patents with strong prior art and priority dates represent greater financial risk for defendant companies. Similarly, every NPE executes its monetisation strategy slightly differently. Knowing the past behaviour of particular NPEs can inform our estimate of length of suit, cost of counsel, and expected settlement.

Other qualitative data that augment the underwriting model for a specific company include an evaluation of pertinent patents that are available for sale, recent assignments to NPEs, and litigation levels and trends in the company’s business sector, as well as an analysis of the prospect’s operating results and product strategy. Again, as a central participant in the patent market, RPX has clear line of sight on these data points and trends.

It is also worth noting that patent troll litigation creates a host of potential associated costs, including diverting management attention from key strategic imperatives, slowing or cancelling product launches, and diverting capital resource from research and development or hiring legal defence. Any and all of these corollary costs inform RPX’s calculation of a company’s forward-looking NPE risk.  

RPX’s unique combination of proprietary data and experienced assessment has transformed the way NPE-related risk is gauged. What was a black box is now an increasingly transparent system of well-understood costs—and we are using this intelligence every day to reduce members and policy holders’ patent troll exposure and expense. In my next article I’ll share examples of how this transparency has allowed at-risk companies to prepare for and mitigate those risks. 

Paul Scola is head of RPX insurance services at RPX Corporation, which provides patent risk management solutions to 225 companies. RPX aims to reduce the cost and risk of NPE litigation through defensive patent acquisition, liability insurance, and market intelligence and strategic advisory services. He can be contacted at: pscola@rpxcorp.com  

NPE, Paul Scola, RPX Corporation, insurance, patent trolls

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