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An NPE Update

An NPE Update. January 16 , 2015. Governing Innovation: the law, economics, and political economy of patent systems Harvard University Daniel P. McCurdy, Senior Vice President, RPX. Common Questions about NPEs. Volume: Is NPE patent risk growing or shrinking? Who is most impacted?

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An NPE Update

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  1. An NPE Update January 16, 2015 Governing Innovation: the law, economics, and political economy of patent systems Harvard University Daniel P. McCurdy, Senior Vice President, RPX

  2. Common Questions about NPEs • Volume: Is NPE patent risk growing or shrinking? Who is most impacted? • Severity: What is the cost? • Source: What patents are being asserted? Where did they originate? • Market: What is the status of patent sales? • Economics: What are the economics of the NPE business model?

  3. NPE Defendants Backlog Down as Terminations Outpace Additions Source: RPX Research Methodology Notes: “Total active NPE defendants” is the total number of NPE case/active defendant pairings. “Backlog” is the number of total active NPE defendants at the end of a given year. For example, at the end of 2010 there were 4,659 total active NPE defendants.

  4. No One Is Immune~2,000 Unique Companies Sued in 2014 Samsung Google Microsoft Apple Amazon AT&T Verizon LG Electronics HTC Sony Sprint Hewlett-Packard ZTE Huawei Dell Cisco Wal-Mart Sears Target Facebook BMW Toshiba Pantech ASUSTek Honda Fujitsu Blackberry Nokia Canon Best Buy Nissan Source: RPX Research

  5. Not Just a Big Company Problem Unique NPE Defendants Named (i.e. AT&T counted once) Total NPE Defendants Named (i.e. AT&T counted 65 times) Source: RPX Research

  6. More Litigation in Certain Sectors New Campaigns 2014 Defendants Added 2014 Source: RPX Research

  7. Common Questions about NPEs • Volume: Is NPE patent risk growing? Who is most impacted? • Severity: What is it costing the industry to resolve NPE suits? • Source: What patents are being asserted? Where is their origin? • Market: What is the state of the secondary market for patents? • Economics: What are the economics of the NPE business model?

  8. NPEs Cost Industry ~$13B in 2013 Total Direct Costs of NPEs Source: RPX Research. RPX NPE Cost Study Report 2013

  9. ~70% of NPE Cost Is Litigation • Other NPE-related costs • Patent acquisition • Validity challenges outside of litigation • Clearance searches • Non-litigation assertions • Legal fees to outside counsel • License fees • Patent litigation • Legal fees to outside counsel / vendors • Settlements and judgments Source: RPX Research. RPX NPE Cost Study Report 2013

  10. Wide Distribution of Resolution Costs Cost to Resolve an NPE Suit Source: RPX Research. RPX NPE Cost Study Report 2013 Up to $500M+ 95%-tile $17.2M 75%-tile $1.9M Median $520K 25%-tile $150K

  11. Larger Companies Pay More to Resolve Suits Average Cost to Resolve Defendant Revenue Average Cost to Resolve (Excluding Suits >$10M) Defendant Revenue Legal Cost Settlement Cost Source: RPX Research. RPX NPE Cost Study Report 2013

  12. Legal Costs Generally Exceed Settlements Settlement Legal Cost Total Cost to Resolve Least Expensive Cases Most Expensive Cases Source: RPX Research. RPX NPE Cost Study Report 2013

  13. Common Questions about NPEs • Volume: Is NPE patent risk growing? Who is most impacted? • Severity: What is it costing the industry to resolve NPE suits? • Source: What patents are being asserted? Where is their origin? • Market: What is the state of the secondary market for patents? • Economics: What are the economics of the NPE business model?

  14. Most NPEs Assert One Patent per Case Patents per NPE Case in 2014 Source: RPX Research

  15. Dot-Com Boom: Fertile Ground for NPEs? Priority Date of NPE Asserted Patents 2014 Source: RPX Research Median

  16. Half of NPE-asserted Patents Are “Software” Patents in 2012 NPE Litigations Note: Based on random sample of 825 patents litigated in 2012. Results have 95% confidence within a +/-5% interval Source: RPX Research Claims categorized as a computer-implemented invention

  17. Will Alice Change Landscape for Software Patents? • Alice Corp v. CLS Bank decision in June 2014 • Programming a general purpose computer to apply an identified abstract idea is not sufficient to overcome a §101 invalidity challenge • 16 of 20 Alice-related challenges to validity have been successful to date • 7 of 9 summary judgment motions were successful • 7 of 9 Rule 12 motions were successful • 2 PTAB challenges were successful • Many unsettled questions both on substance of decision and implications for process • Note: Based on identified decisions as of October 15, 2014 • Source: RPX Research

  18. OpCo Original Patentee in >70% of NPE Litigations 2013 NPE Litigations Source: RPX Research University Individual Inventor Operating Company

  19. Patents Transacted in ~60% of NPE Litigations 2014 NPE Litigations Source: RPX Research Patent Not Transacted (but often marketed) Patent Transacted

  20. Common Questions about NPEs • Volume: Is NPE patent risk growing? Who is most impacted? • Severity: What is it costing the industry to resolve NPE suits? • Source: What patents are being asserted? Where is their origin? • Market: What is the state of the secondary market for patents? • Economics: What are the economics of the NPE business model?

  21. Portfolios Offered to RPX Have Steadily Increased Open Market Portfolios Source: RPX Research Sources of increased volume 2010-13 +116 E-commerce and software +89 Semiconductors +47 Mobile communications +20 Networking +32 All other sectors

  22. Wide Mix of Portfolios Offered 2014 Open Market Source: RPX Research Other Sectors Financial Services Media Content and Distribution E-commerce and Software Consumer Electronics and PCs Networking Semiconductors Mobile Communications and Devices

  23. RPX tracks a robust open market for patents Portfolio Transaction Rate >40% From 2010-2011 (>50% to NPEs) • 1. RPX considers a portfolio to have transacted if: • a) at least one patent from the portfolio transacted with a recorded execution date after RPX was offered the portfolio; and • b) the transaction was to a third party • Source: RPX Research and Analysis 1

  24. Around 30-40% of portfolios transact, >50% to NPEs Portfolios Transacted1 in Open Market, 2009-2012 • 1. 2009-2012 timeframe based on date of portfolio offer, not transaction date. RPX considers a portfolio to have transacted if: • a) at least one patent from the portfolio transacted with a recorded execution date after RPX was offered the portfolio; and • b) the transaction was to a third party • Note: 2013-2014 numbers excluded from this slide due to typical lag time for portfolio to transact (average 300 days from offer to execution date) • Source: RPX Research and Analysis Transacted Portfolios, 2009-2012 • Average portfolio size: 19 patents • Median portfolio size: 3 patents • Average patent priority year: 1999 • >70% come from operating company sellers • >50% transact to NPEs • Average time from offer date to transaction date: 300 days

  25. Major US Patent Buyers and Sellers Open Market • 1. NPE = Non-practicing entities earning revenue primarily through monetizing patents or operating companies monetizing non-core patents • 2. “Marketed” based on portfolios offered to RPX from 2013-2014 • 3. “Sold” and “Bought” based on portfolios marketed 2011-14 1 2 3 3

  26. RPX Open Market Prices Average RPX Price per US Patent Source: RPX Research

  27. Common Questions about NPEs • Volume: Is NPE patent risk growing? Who is most impacted? • Severity: What is it costing the industry to resolve NPE suits? • Source: What patents are being asserted? Where is their origin? • Market: What is the state of the secondary market for patents? • Economics: What are the economics of the NPE business model?

  28. Common Questions about NPEs • Volume: Is NPE patent risk growing? Who is most impacted? • Growing through 2013, some decline in 2014. Broad impact across industry • Severity: What is it costing the industry to resolve NPE suits? • $13B total cost to industry • Median cost to resolve one NPE suit ~$500K, but average cost is several million • Source: What patents are being asserted? Where is their origin? • Most asserted patents transacted first. Most come from operating companies • Market: What is the state of the secondary market for patents? • Robust, many transactions, NPEs are ~50% of buyers • Economics: What are the economics of the NPE business model? • Maybe 10-20% of industry cost goes to patent holders • Based on publicly traded company performance to date it is difficult to make money • NPE economics supports proactive risk management solutions • Source: RPX Research

  29. An NPE Update January 16, 2015 Governing Innovation: the law, economics, and political economy of patent systems Harvard University Daniel P. McCurdy, Senior Vice President, RPX

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