The Myths and Facts of Patent Troll and Excessive Payment : Have Non-Practicing Entities (NPEs) Been Overcompensated?

In most headline commentaries and legal studies, non-practicing entities or NPEs are alleged to have dramatically increased the business costs of practicing or producing companies. NPEs are sometimes monikered as patent trolls who would hold up practicing companies that have made irreversible capital investment to adopt the patented technology, and then demand exorbitant royalties or seek excessive settlements or damage awards. This paper starts with a comprehensive review of the theoretical studies in NPE economics. It finds that various holdup models are premised on specific assumptions and simplifications, and therefore, are unable to provide unambiguous guidance to judge whether NPEs had been systematically overcompensated. Empirical analysis is still at its very early stage due mainly to the data availability. The researches published in the past two to three years focused mostly on patent damage awards. However, the evidence is mixed at best; and most likely, damage awards to NPEs are not extravagant.This paper presents the first study in the royalty rates earned by NPE licensors. Based on the royalty data from two major vendors, ktMine and RoyaltySources, the study examines the royalty rates in license agreements with NPE licensors, and compares them with the rates reported in other comparable licenses. The econometric analysis fails to reject the hypothesis that the royalty rates obtained by NPEs are not different than the rates charged by practicing company licensors. The conclusion remains robustly true with or without controlling the effects of upfront payments, exclusivity, and industries. The finding, coupled with other major ones from the relevant empirical studies in NPEs and patents, raised four interesting issues, which are summarized by this paper as NPE success rate puzzle, NPE valuation puzzle, value metrics relevance puzzle, and value consistency puzzle. Six topics for further research are proposed during the discussion about the puzzles