Real Drawback to NPE Model is Inefficiency, not Greed

NPEs are often portrayed as predatory and opportunistic manipulators of intellectual property. But to do so is to confuse the means with the end. NPEs have provided one of the few ways for creators of intellectual property to monetize their assets. Most inventors or owners of intellectual property who feel their patents are being infringed by a corporation are too small to make a compelling case for licensing and insufficiently capitalized to mount legal action. Their only viable alternative has been to “sell” their patents to NPEs, who then take on the cost and risk of monetizing those intellectual property assets through the courts.

While NPEs’ willingness to purchase patents has helped develop a much-needed market for otherwise illiquid assets – a highly desirable end for any economic activity – the NPEs’ means of doing so is highly inefficient.

The source of that inefficiency, of course, is the legal system. It takes time and energy for NPEs to prepare and document an assertion; even more to prepare and execute a litigation. The risk of losing the case must also be priced into any action, and inventors and NPEs share this risk – which is why the purchase price typically paid by an NPE for patents is relatively modest, with a larger payout for the inventor waiting at the end of the hoped-for successful legal action. Inventors also often need to invest a significant amount of time traveling to and sitting through depositions and other legal discovery with no guarantee of a positive trial outcome. Lastly, legal costs often amount to more than half of the cost incurred by defendants, further decreasing the amount of money ultimately going to the inventor.

A more efficient way to create liquidity for patent owners is to remove the need for legal filings, discovery, assertion, and/or trial from the process. Instead of generating capital to pay inventors through a single, large legal award, defensive patent aggregators generate capital by collecting funds from multiple, relatively small contributions that come from precisely those companies that would otherwise face financial exposure from patent assertion.

Aggregators purchasing patents defensively can thus offer fair-market value to inventors without a back-end payment based on litigation that is risky and costly for both plaintiff and defendant. It is a business model built on the possibility that acquired patents could have been asserted rather than the active threat of same. As such it is a far more rational and efficient way to price and monetize this important asset class.