Patent litigation is a high-stakes arena where the value of intellectual property and the uncertainty surrounding it collide. In October I will be presenting a paper at Northwestern University, which delves into this complex interplay.1 The paper employs an innovative approach to use patent litigation data as a means of exploring patent value and uncertainty in patent rights.
The dual problem of patent value and uncertain property rights
Litigation requires that a patent is valuable enough to justify the expected litigation costs, and for there to be some uncertainty surrounding the patent right. The more uncertainty there is, the greater the risk of litigation.
In our paper, we draw an analogy to real property: in the Old West, land values depended not only on intrinsic qualities of the land, but also the clarity of property rights and the strength of enforcement mechanisms. On the TV show Bonanza, the value of the Ponderosa Ranch was tied not only to the quality of the land but also to the Cartwright family’s ability to enforce their title, whether through formal legal institutions (the local sheriff) or self-help measures (the number of able-bodied Cartwrights available during a given episode).
That is, the title is only as good as the ability to enforce it, and uncertainty over that title will make it difficult to enforce. The same principle applies to patenting, where legal uncertainty is especially pervasive.
Distinguishing value and uncertainty
Untangling the factors that influence patent value and uncertainty is challenging due to their intertwined nature. For instance, broader patents are generally more valuable but also more likely to face challenges, raising the question: Is the increased litigation a result of their value, the uncertainty about validity, or both?2 Similarly, patents receiving more forward citations may be more valuable; or there may be less uncertainty as to the boundaries of the claims.
In the paper, we rely on several factors often associated with patent value. Among the factors are:
- Whether a patent has ever been disclosed as standard essential
- The total number of forward citations (patent citations made by other assignees)
- The total number self-citations (patent citations made by the same assignee)
- The number of times the patent has been pledged in a security interest statement
- The number of times the patent has changed ownership
Because we use a dynamic model, we examine differences in litigation rates before and after those factors are observed. Our methodology leverages the timing of information disclosure to disentangle the value effect from the uncertainty effect for each factor. 3
Results
Using survival time regressions, we are able to make inferences about the characteristics that are associated with value and those that are associated with uncertainty. Our findings reveal significant insights for IP professionals.
Among other things, we find:
- The total number of citations a patent receives correlates with a higher rate of litigation, suggesting its value. However, when those citations are observed in the marketplace, the rate of litigation drops, indicating reduced uncertainty
- Standard essential patents (SEPs) have a higher rate of litigation, again consistent with higher patent value. However, the disclosure of a patent as standard essential lowers the rate of litigation, suggesting lower uncertainty (about whether the patent is a SEP).
- We find similar results for self-citations and for the frequency that the patent is used in a security agreement.
Our methodological approach enables us to separate value effects and uncertainty effects. We find that when the information about value is observed, it lowers the market uncertainty leading to fewer litigated cases.
Why should IP managers care?
Our results have implications for IP managers. By understanding how market perceptions of patent value and uncertainty influence litigation, IP managers can take proactive steps to mitigate risks and increase bargaining positions. This is particularly crucial in emerging technologies, where the landscape is often rife with uncertainty. By employing third-party expert valuation or refining claims during prosecution, IP managers can enhance the clarity and strength of their patent portfolios.
I look forward to sharing more insights at the upcoming conference and encourage IP professionals to engage in this crucial conversation on navigating the complex terrain of patent value and uncertainty.
1 Alan C. Marco and Richard Miller. Patent Value, Uncertainty, and Standard Declaration: Inferences from Patent Litigation. Working Paper (2024). Fourth Annual Empirical Research Conference on Standardization, Pritzker School of Law, Northwestern University.
2 This raises the statistical problem of endogeneity or simultaneity.
3 Formally, we construct a control group of non-litigated patents, matched to our litigated patents based on over 20 characteristics that are observable at the time of patent grant. Then we estimate survival time regressions on the incidence of litigation events, based on time-varying post-grant characteristics, including the number of forward citations, the number of self-citations, the disclosure of the patent as standard essential, the number of ownership changes, and the number of times the patent is pledged in a security interest. We include both the total prospective counts for those variables, as well as the running totals for those variables. See the paper for more details.