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In findings that should be filed under “No S**t Sherlock”, James Bessen, Jennifer Ford and Michael Meurer report that a detailed analysis of the stock price movements of publicly-quoted operating companies in the days following patent assertions by NPEs shows that they fall, sometimes quite sharply. Whoever would have thought it? The authors conclude: “The loss of billions of dollars of wealth associated with these lawsuits harms society. While the lawsuits increase incentives to acquire vague, over-reaching patents, they decrease incentives for real innovation overall.”
On the Gametime IP blog Patrick Anderson takes Bessen, Ford and Meurer to task over their working paper, entitled The Private and Social Costs of Patent Trolls. Sadly, however, although Anderson does a very effective job, out there in the real world nobody is listening. Reports on the CNN Money, Washington Post, Business Insider and Ars Technica websites, among others, all report the findings uncritically. Now I think Anderson’s blog is among the best there is on patents, but how many people read it in comparison to those sites that I have mentioned? The fact is that, whether you like it or not, this paper is going to be very influential - just as Patent Failure, written by Bessen and Meurer in 2008 continues to be cited approvingly in countless reports and policy papers to this day; even though it too is deeply flawed.
I could write quite a few thousand words now on why I believe this new study is full of holes, but I have other things to do – and in any case Anderson covers a lot of it (as do the comments under his piece) – so I will focus on just a couple of things:
• It is not a huge surprise that when the markets learn of potentially bad news they react negatively. Having patents asserted against you is never good as the downsides of losing, especially in the US, can be pretty severe. Against that, coming out at the other end of a patent suit is very often viewed by the markets as good news. Research we published in the first ever issue of IAM showed that companies listed on the London Stock Exchange saw their stock prices marked upwards when they announced they had concluded licensing agreements (even though further analysis showed that market makers often did not understand what had been agreed). Famously, RIM’s share price soared after it reached a settlement agreement with NPE NTP in the BlackBerry case. This happens all the time when settlements are announced and cases are decided. To get a truly accurate picture of how stock prices react to litigation, shouldn’t the authors have looked at the close of cases too? Shouldn’t they also have looked at whether the stock bounces back after the markets have absorbed the news of the assertion in the first place? If stocks are marked down in reaction to the bad news but then recover over a period of a few weeks, surely the initial downturn does not really mean much and cannot have any significant effect on company "wealth" and the incentive to innovate.
• As far as I can see, the authors do not actually tell us which NPEs they have looked at. However, we are informed that they have used “a database of patent lawsuits collected by Patent Freedom (2011)” to “perform 4,114 of these event studies from 1990 through 2010”. If you look at PatentFreedom’s list of the NPEs that own the most patents you can see they include names such as RoundRock, MOSAID and Acacia. It is a matter of fact that all three of these have close working relationships with operating companies and manage portfolios that have been acquired from them - see here, here and here. What we do not know is how many of those 4,114 suits involved NPEs asserting rights that had previously been owned by operating companies and/or in which operating companies continue to have a stake. That strikes me as being very important: if a company has sold patents to an NPE it has benefited financially from that sale; if it gets a cut from the results of litigation, it receives an on-going financial benefit. Aren’t these “good” things because they reward investments in R&D? In addition, other NPEs listed by PatentFreedom include WARF, CSIRO, Tessera, InterDigital and Rambus. These are all organisations that do a lot of R&D work. It would be very difficult to define them as the “trolls” mentioned in the paper’s title. In short, it would be interesting to know how much scrutiny of what PatentFreedom defines as an NPE the authors have undertaken and how comfortable they are with its definitions. PatentFreedom, of course, sells services designed to counter NPE assertions. It has an interest in making the “problem” seem as large as possible.
These are just a couple of points. As I say, with a bit more time there are many more I could raise. The bottom line here, though, is that this is a much more complex issue than Bessen, Ford and Meurer make it seem. There are many nuances in what NPEs do and there are major overlaps between their operations and the technology companies that the authors portray as victims in the paper. Once all of this is thrown into the mix, I cannot see how the conclusions the study come to can be anything other than problematical, to say the least.
That said, I for one welcome what Bessen, Ford and Meurer, and others like them, do. In questioning the patent system as it stands, in the detail that they do, they force its supporters to counter their arguments in detail. That, in turn, means everyone looks much more closely at the issues, which can only lead to greater understanding. This may not be reflected in the mainstream press, but you can’t blame Bessen, Ford and Meurer for that. Instead, the fault, I fear, lies a little closer to home.
IP litigation, Patents, IP business, IP valuation