#16: Some Empirical Data on PAEs

I found a post on http://www.patentlyo.com/ called “Paten Trolls in Public” that discusses empirical evidence on 10 publicly listed Patent Assertion Entities (PAEs) in business from 2005 to 2010. More specifically the study looked at Acacia, Asure, Interdigital, Mosaid, Network-1, OPTi, Rambus, Tessera, Virnetx, and Wi-Lam. It is interesting to take a look at this data while Congress considers the SHEILD Act. Just to reiterate the SHEILD Act would place a higher burden on PAEs, by making them liable for both sides’ legal fees if they sue and lose. They were able to come up with data for three very interesting questions.

1. How much licensing revenue do PAEs get per company sued?
Looking at these PAEs lawsuits flied in the Patent Freedom’s database of patent trolls they found that the average licensing revenues totaled nearly $6 billion. (You can find more information in there paper The Private and Social Costs of Patent Trolls for details on this database and the matching). The mean licensing revenue per defendant comes to 3.8 million in 2010 however this number is a bit low as it does not account for accruals.

2. How does revenue vary with PAE business model?

We identified three different types of business models:
A) "middlemen" who acquire or license patents from third party inventors (e.g., Acacia). Middlemen based PAEs file 80% of the lawsuits but earn only 0.7 million per defendant.
B) "R&D-based" who conduct R&D and file their own patents (e.g., Rambus). The R&D based PAEs file fewer lawsuits but their licensing revenues are greater. More specifically they account for  6% of all lawsuits but 83% of the revenues. This means that they earn about $54 million per defendant.
C) "salvage" where an operating company becomes a PAE using patents it developed for its own business (e.g., Asure / Forgent).

I think this suggests that the SHEILD Act could destroy these middlemen-based PAEs as they would have a much higher risk of loosing money because they sue so much more, inevitably they will lose some cases and will have to pay even more money. In addition, their revenue per case is lower which makes it riskier to sue as they may loose more money than they could earn from winning the case.

3. How much of the licensing revenue flows to inventors?
In addition, the study reported that only 7% of PAEs licensing revenues earned flowed to third party investors. For the “middlemen” 31% and for R&D only 26% of licensing revenue flows to third party investors. Most of the revenue then is needed for transaction costs and investors really do not benefit as much as they could at perhaps a more innovative company. If the SHIELD Act reduces profits, investors will get even less which may lead them to back off.