US patent litigation at its lowest ebb in years – but the secondary market still has plenty of pull

Patent risk management firms RPX and Unified Patents have each started the new year by releasing preliminary numbers on US patent lawsuits filed in 2016. With figures dramatically down year on year – as many market observers would no doubt have expected – it may seem obvious to conclude that patent transaction deal flow will also drop-off over the next 12 months. But there may be reason to believe that demand for third-party patent assets could be boosted as would-be plaintiffs seek out new targets.

According to Unified Patents, 4,382 patent infringement suits were filed in the United States last year. That represents a substantial year-on-year drop of close to 24.8%, and is the lowest volume of new cases since 2011. That was the year, of course, when the America Invents Act came into effect, introducing the inter partes review regime for challenging the validity of plaintiffs’ patents, as well as heralding a change in joinder rules which precipitated a boom in lawsuit numbers as litigants rushed to file complaints under the old system. After hitting a high in 2013, patent suit volume has fallen each year since, with the US Supreme Court’s Alice decision likely contributing to the slowdown. It remains to be seen if the huge 2016 drop is something of an anomaly, or the harbinger of a longer-term downward trend.

Both Unified Patents and RPX have business models centred on reducing the litigation threat posed by NPEs to operating companies, and both report that the former continued to account for the majority of new infringement cases being launched. Unified Patents reports that while NPEs initiated 55% of patent lawsuits filed in 2016. However, according to RPX, the various legislative measures aimed at curbing litigation along with judicial developments such as Alice seem to be having an impact on the NPE business. The frequency of NPE assertion campaigns targeting defendants with annual revenues of over $50 billion has fallen considerably since 2013; while the frequency for defendants with revenues below $1 billion have remained pretty much flat over the same period.

Moreover, RPX calculates that in 2016, two-thirds of NPE targets were companies with revenues of below $100 million – companies that, as RPX puts it, “cannot afford even one expensive fight”. The decline in lawsuits mostly seems to have been felt by larger companies, perhaps suggesting that NPEs – themselves in a precarious financial position when litigating against large corporates with deep pockets – are increasingly targeting smaller businesses that may be more likely to settle disputes early.

Both RPX and Unified Patents obviously have more than a passing interest in highlighting the NPE threat to SMEs; many larger companies will already be signed up to their services or see no need to join, so it is in the SME segment where both risk management firms likely see the best prospects for growing their membership revenues.

Nevertheless, while the fall in litigation would at first appear to add to the overall gloom that seems to be hanging over the patent market at the moment, there are reasons to think that the deal-making environment will not suffer too much. Recent research from Stanford Law School and ROL Group indicates that certain types of early-stage business model have better dispute win rates when litigating patents that they have acquired externally, as opposed to patents they have filed themselves. So while purchased patents may do little to help SMEs deter the NPE assertions of which they increasingly seem to be the target, they can give leverage in disputes with other operating companies – as well as facilitating collaboration deals and attracting investment. Moreover, the likes of RPX and other defensive aggregators will continue to be customers for patents as they seek to improve their service offering and sign up new members; while assertion-focused NPEs themselves will turn to the secondary market in order to acquire higher quality assets that may have better prospects of succeeding in litigation and generating returns.

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