Unlocking the black box of NPE risk
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.
