Does Fighting Hard Reduce NPE Risk?

When it comes to NPE litigation, agreeing to settle can be hard to accept.  Fighting back and fighting hard seems attractive – it just feels right.  But is it the cost-effective way to deal with a patent assertion?  Based on data RPX has been compiling from its clients and public sources the answer seems to be “generally no”.

Consider the two typical arguments in favor of the “fight hard” position:

1. Fighting hard earns a company a reputation as a tough target.  You will be sued less often.
2. Fighting hard saves money.  It will reduce settlements by more than the additional legal cost.

As for the first argument, neither our data nor our experience support it.  In our frequent negotiations with NPEs to buy assets and/or release RPX clients from litigations, we have never heard that a company’s reputation for fighting or not fighting has ever influenced the NPE’s decision to name a defendant.

Furthermore, we analyze several thousand NPE suits each year, and have never seen compelling evidence that companies that persist in litigation longer are sued less often.  In fact, companies that stay in NPE cases longer – a proxy for a “fighting hard” reputation – appear to have the same (or worse) growth in NPE suits compared to companies that resolve cases faster.  For example, plaintiffs that averaged more than 370 days in suit saw their NPE caseloads grow at approximately 36% from 2008 to 2011, no different than companies that were resolving NPE cases in less than 370 days.

The second argument also seems to be a fallacy.  In our experience, NPEs consistently report that the range at which they would be willing to settle is generally lowest near the start of the case.  This makes basic mathematical sense: an NPE seeking a 20% annual return to investors would be willing to accept approximately 30% less for settling now versus two years hence.  Moreover, when factoring in costs of plaintiff counsel of 10-25% of the expected settlement, an NPE would probably accept even less now versus two years in the future.

That is consistent with our data.  In more than 500 litigations we examined, cases that last longer than one year had all-in costs that were fully five times higher than in cases lasting less than a year.

Skeptics could look at this data and claim that it actually proves a solid legal defense is the only way to achieve a favorable settlement – that defendants need to fight hard for at least a year to establish a strong negotiating position.  Some observers might assert that the longer-lasting cases probably had higher initial demands and fighting hard paid for itself by actually reducing the ultimate settlement.

Which raises the question: where should the burden of proof lie in the “fight hard” question?  Those with the most to gain from pursuing an aggressive defense strategy should be able to provide evidence that fighting hard pays dividends, either in the form of fewer litigations or lower payouts.  Fighting an unreasonable demand is always warranted, but our data indicates that there is little to be gained from being impractically intransigent.

The simplest and most logical approach is to treat a patent assertion as what it is: a business transaction.  Before calling legal counsel, open a dialogue with the NPE to find out what the financial demands are.  Conduct a cost/benefit analysis of fighting versus settling.  Again, if the demands are unreasonable, defendants can and should be ready to fight.  But in the great majority of cases, making a reasonable counter-offer is likely to produce a settlement that is a more cost-effective result than a “fight hard” stance.  Building a reputation for being tough on NPEs is expensive and the reputational benefits are elusive, at best.