The Perils of

Not all patents are created equal. While all issued patents carry the presumption of validity, the functional and legal legitimacy of most asserted patents is almost always called into question. When a patent is identified in an assertion letter, the first reaction of even the most experienced corporate IP counsel is usually to fight the alleged infringement and challenge the validity of the asserted patent in court.

But in almost all cases, it’s better to resist that temptation. A defendant might win the case, but the victory is likely to be a Pyrrhic one because the validity of a patent is rarely ascertained until well into the litigation process (and that process can grow even longer in those instances where the patent is thrown into re-examination before the USPTO). In even a relatively fast-moving case, it can easily take many months and cost hundreds of thousands of dollars in legal fees alone to prove that a patent and/or particular claim is invalid.

And even though a single patent assertion often has multiple named defendants, companies rarely choose to mount a joint defense, meaning the legal costs are borne by each defendant separately. Settling with the asserter – while distasteful, particularly if they are asserting a likely invalid patent – is usually the financially prudent course.

So the choice between settling and fighting an “invalid” patent in litigation is fairly straightforward. Once an assertion letter arrives, the cost/benefit argument in favor of settling is compelling. When a questionable, but potentially dangerous patent becomes available on the open market, however, the equation is slightly different. There is time for careful analysis of the asset’s legal viability when deciding whether to purchase or pass.

Even so, at RPX our strategy is generally to err on the side of financial caution. Validity is a highly subjective concept under patent law. Most problem patents aren’t strictly invalid in their own right – they are just being asserted in way that is broader than the valid coverage of their claims. But establishing where that line of “valid coverage” is crossed is rarely clear and never easy in court. So, even for patents of highly doubtful validity, the buy-or-pass decision usually boils down to either RPX paying the inventor/owner now or our members paying their attorneys later. And it is far more cost-effective to pay the (appropriately discounted) purchase price.

For example, RPX recently acquired a patent covering a device with a graphical user interface for retrieving digital media for playback. This patent could likely have been asserted by the prior owner against an incredibly broad set of products. The broader the assertion, the more likely the patent is to be invalidated, but also the greater potential cost and risk for our member companies. And the purchase price for the patent was reasonable in light of the potential aggregate costs of discovery and litigation. A credible legal case could be made that this patent would be considered invalid in many infringement scenarios. A stronger financial case can be made to take it out of circulation.

There are, of course, instances where an available patent asset is of dubious validity and not available at an appropriately, reasonably discounted price.Recently we considered purchasing a patent covering music identification via a mobile device. After a careful analysis of the potential litigation value vs. cost of the patent, we chose not to purchase the asset. The courts may yet endorse the validity of this patent, but thus far it has not been successfully asserted or generated meaningful settlements.

Ultimately our goal at RPX is to bring a rigorous, market-based economic rationale to the buying and selling of intellectual property. In the long-term this will mean valuing patents purely on their functional merits. In the near-term, all of us will need to treat “invalid” patents as legitimate and high-risk legal assets that warrant prudent and rational consideration.