Cost-Avoidance Key to Exceptional ROI from Defensive Aggregation

As our previous post illustrated, per-case costs of defending against patent assertions are going up. Further compounding the overall problem is the fact that the total number of assertions is also on the rise, creating even more financial risk for IP-driven companies. Data from Patent Freedom show that through August 31, 2009, 343 patent cases were filed in the United States. This figure for the first eight months of 2009 already almost matches the 359 cases filed in all of 2008, suggesting that the cumulative volume of NPE cases in 2009 could grow 50% over 2008. Notably, in the 2009 cases, 19.5% involved NPEs, up from 12.8% of the cases in 2008. However, for companies in the technology sector, the data is dramatically worse. RPX analyzed 60 U.S. and Asian technology companies and concluded that to date in 2009 more than 80% of patent assertions against these companies stemmed from non-practicing entities. These statistics suggest that the financial logic of defensive aggregation has become increasingly compelling.

For example, consider a mid-sized company with $825 million in annual operating income. If the company is named in a typical patent assertion with $5 million in damages at risk, it might be one of five defendants. Based on data recently published by the American Intellectual Property Law Association(AIPLA), this company’s legal costs through discovery alone would be approximately $1.8 million, with total costs likely to exceed $3 million. Note that these estimated costs are not for high-end, complex assertions; they relate to what AIPLA’s respondents consider an ‘average’ patent-infringement action, and do not include settlements.

To join RPX’s defensive patent aggregation, a firm of this size would pay $2.5 million per year, meaning the cost of membership would be well under the legal fees saved by avoiding two average assertions that went past discovery, or total costs of just one complaint.

For small firms, of course, a patent assertion can be a death blow. The hundreds of thousands of dollars needed just to pay for discovery could easily represent fully two or three months’ burn rate for an early-stage software company. But for a firm with operating income below $5 million – including startups that have no revenue, let alone operating income – the $35,000 annual cost to join RPX is comparable to the Director’s and Officer’s insurance that is considered indispensible for venture-backed companies, even though the likelihood and consequences of patent litigation are greater and more severe than most of the events covered by D&O insurance.

For larger firms, the numbers are especially telling. A large technology firm with $5 billion or more in operating income would pay $4.9 million in annual membership to RPX. Such firms are also usually named in assertions with larger potential damages that would exceed $25 million, and they are also named much more frequently. The world’s leading consumer electronics firms are asserted 10 to 12 times per year on average, according to AIPLA. Such a firm’s RPX fee is ‘paid for’ by avoiding just the discovery phase of only two assertions; the reduced risk of large damages awards is just another benefit of membership.

Defensive patent aggregation makes financial sense for companies that recognize and understand the true all-in costs of patent assertions, and have the internal discipline to calculate investment ROIs based on avoided costs as well as potential revenues. To update Benjamin Franklin’s dictum, especially appropriate in today’s flat-growth economic environment: “$5 million saved is $5 million earned”.