Joff Wild

James Bessen and Michael Meurer have published a number of highly-publicised papers and books attacking what they see as significant flaws in the US patent system and claiming that these cost American companies – large and small – billions of dollars that could otherwise be spent on what they see as more productive things, such as R&D. Most recently, the pair published an article entitled The Direct Costs from NPE Disputes in which they reported that US “firms accrued $29 billion of direct costs in 2011” as a result of NPE-related litigation. This was given significant and almost entirely unquestioning coverage by a number of mainstream news sources (although both the Patentology and Gametime IP blogs took issue with it).

Because Bessen and Meurer do get such wide coverage, it is vital that what they say is subjected to in-depth examination. They make big claims, involving huge numbers; both of which are bound to affect overall debate on, and potentially decision-making around, the patent system. Therefore, they have to be right. But when you speak to people who operate day in and day out in the patent market, many say they aren’t – that, actually, there are some pretty major flaws in their methodologies that will lead them to overstate problems and exaggerate numbers. You get the feeling that many read what Bessen and Meurer write with frustration as “but, but, but, but this is just plain wrong …” rings around their heads.

That, of course, is not an adequate response. You can’t just “feel” something is wrong, you have to show that it is. On Wednesday, the critics of Bessen and Meurer were handed what could be a very important weapon with the publication of a paper entitled Analyzing the Role of Non-Practicing Entities in the Patent System. Written by David Schwartz of Chicago-Kent College of Law and Jay Kesan of the University of Illinois College of Law, the paper’s abstract reads:

Currently, there is an important debate about the role of non-practicing entities in patent litigation. People are asking: what are the costs and benefits associated with NPE litigation? Are they too high, too low, or just right? This paper makes two contributions to the discussion. First, we review a recent study, "The Direct Costs of NPE Disputes," by James Bessen and Michael J. Meurer. The study presents new data on the litigation costs and settlement expenses incurred by a subset of defendants in NPE cases. Some of their findings are provocative, but we find their methodology to be deficient in several respects, which limits the usefulness of the data and thus the implications that can be drawn from them. We also offer suggestions for future research on NPEs, including data collection and analysis. Second, we argue that the study asks the wrong question. The debate should be reframed to focus on the merits of the lawsuits, including patent system changes focusing on reducing transaction costs (e.g., lawyers’ fees) in patent litigation, instead of focusing solely on whether the patent holder is a non-practicing entity.

Schwartz and Kesan do not say that Bessen and Meurer are wrong about NPEs, but what they do say is that for their claims to be regarded as credible, there are four issues that the Boston University academics have to provide a great deal more clarity on:

(1) Figures Based on Biased Sample. Bessen & Meurer’s $29 billion calculation of the direct cost of NPE patent assertions should be viewed as the highest possible limit. The true number is very likely to be substantially lower. It is the outer bound because the survey is not a random sample; instead it likely is a biased sample, which renders Bessen & Meurer’s extrapolation of the total costs similarly biased too high.

(2) Lack of Basis for Comparison of Figures. The vast majority of the $29 billion figure consists of settlement, licensing, and judgment amounts. For economists, these are not “costs,” as they are classified in the Bessen & Meurer study, but rather “transfers.” Such transfers to patent holders are the contemplated rewards of the patent system. Furthermore, before declaring litigation costs (i.e., lawyers’ fees) too high, there must be some basis for comparison. Bessen & Meurer provide no such comparison. For further academic studies, we propose comparing them to either the ratio of lawyers’ fees to settlements in practicing entity patent litigation or complex commercial litigation more broadly.

(3) Questionable Definition of NPE. Bessen & Meurer’s calculations rest upon a questionable and very broad definition of NPE. We suggest that they disaggregate among different categories of NPE, which should be possible with RPX’s database.

(4) Lack of Credible Information on Benefits of NPEs. Bessen & Meurer’s estimate of the benefits of NPE litigation is based upon an analysis of very limited information, namely SEC filings from 12 publicly traded NPEs. We recommend a survey of NPE plaintiffs analogous to the survey of NPE defendants to provide more complete information on this issue.

Furthermore, Schwartz and Kesan state:

In general, we believe that focusing on whether the patent holder is an NPE or practicing entity is the wrong question. Our point is not to extol or criticize NPEs. There surely are some NPEs that are bad actors and some that are good actors. Instead, our goal is to focus the conversation on the right question: analyzing the merits of the cases, and locating ways to reduce patent litigation expenses by creating or improving institutional mechanisms to address patent validity and patent infringement.

While they also note that the data Bessen and Meurer base their claims on was supplied by defensive patent aggregator RPX; leading them to state:

A large portion of RPX’s business model is providing subscriptions to customers who are repeat defendants in patent infringement lawsuits. RPX asserts that its subscription fees “are significantly lower than the typical patent acquisition and defense costs a client would otherwise face.”6 It seems extremely likely that RPX’s clients have experienced high litigation costs, perhaps much higher than the average company. As such, the survey has a strong selection bias here in favor of companies that are repeat defendants in NPE litigation and thus need the services of RPX to reduce future patent liabilities. In other words, high litigation costs are probably the reason the companies became RPX clients in the first instance We also believe that Bessen & Meurer should include more disclosure about the methodology. That is especially important here because it appears that they do not have personal access to some or all of the underlying RPX data.

All in all it is a highly compelling piece of work. As Schwartz and Kesan state, it could well be that Bessen and Meurer are absolutely bang on the money. However, right now it is impossible to reach such a conclusion. In fact, as things stand the likelihood is that they are wrong, perhaps spectacularly so. The onus now is surely on the Boston University pair to respond to the points Schwartz and Kesan have made. Let us hope they do so sooner rather than later.