The Direct Costs from NPE Disputes

Intellectual Property and Patents

Article Snapshot


James Bessen and Michael Meurer


Boston University School of Law, Law and Economics Research Paper No. 12-34, 2012


The authors empirically study the direct costs resulting from NPE litigation and its negative impact on innovation.

Policy Relevance

The large cost that results from NPE litigation is a social problem because it results in a tax on innovation. Better patent notice and patent policy will likely be the required solutions to address the problem because NPEs tend to be heterogeneous rather than homogenous.

Main Points

  • NPEs (non-practicing entities) are parties who own and sometimes assert patents but do not practice the technology covered by their patent.
  • Direct costs include the cost of legal services, license fees, and other direct cost in response to NPE litigation risk.
  • NPE litigation has been around for a long time but recent litigation has exploded to an unprecedented level and scope.
  • Previous literature suggested that NPEs provide a social benefit by helping small innovators access the market; but, the authors’ previous study and this one debunk that assertion and find that many NPE lawsuits are a social loss.
  • Notice failure is a common theme in NPE lawsuits, especially software, whereas the effectiveness of notice in chemical and pharmaceutical inventions is high and the patent system works well for those industries.
  • One notable problem for NPE litigation relating to smaller firms is that legal defense costs represent a greater proportion of their overall revenue, thus making it more costly for them than for larger firms.
  • The data show NPE litigation does not help small innovators.
  • Possible biases and miscalculation concerns raised by the data set are addressed by the authors and explained or refuted.
  • NPE litigation is a problem because NPE direct costs, estimated to be about $29 billion by this paper, are essentially a tax on innovation.


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