Amy Landers has an original and provocative new piece in the Chapman Law Review in which she argues that patent markets may be vulnerable to "bubbles," as in other markets with uncertain asset valuations such as the housing market. Whether patents are subject to bubble behavior in fact remains to be seen, but if Landers is correct this challenges the view that patent monetization entities and other intermediaries that assist in creating a liquid market for patents perform a beneficial function by improving patent valuations and efficiently transferring patent rights among actors in the innovation ecosystem.
Landers first describes the bubble phenomenon, drawing on a range of literature from economics and finance. The basic theory of bubbles she draws from this literature is as follows:
For a typical commodity, fundamental price drivers might include supply scarcity, increased demand, changes in consumer income levels, overall consumer confidence, and employment levels. In contrast, bubble asset prices are driven by the irrational expectation that the asset’s price will continue to rise merely because prices have done so in the past. ... Bubbles can form if buyers are willing to pay an increase based on the mere expectation of turning a profit through resale. In the end, these successive price increases are revealed to be unsustainable, [resulting in a bursting of the bubble and significant downward adjustments in valuation.]"Landers gives a variety of examples of markets that are or might be vulnerable to bubbles, including housing markets and Bitcoin. Landers then argues that patent markets may also be uniquely susceptible. ("Although the promise of an emerging patent market is thought to provide future benefits to invention, innovation, and the public...the possibility that the aggregate influence of this activity could instead destabilize patent values in a manner that mirrors the 'bubble' phenomenon that occurred in certain markets in the past.") Drawing a distinction between "patents priced as legal rights under the statutory definition and patents used for monetization," she contends that the methodology for setting patent monetization values is indeterminate and complicated by "the fact that patent valuations change from one infringer to another, depending on the nature of the use." Thus, she concludes that "few solid benchmarks for setting price exist and none are likely to emerge."
Landers contends that pervasive differences of opinion about patent value and the absence of uniform valuation benchmarks are sufficient to skew pricing and result in bubble scenarios– for instance, "patent assertion entities bidding against each other to obtain the highest-value patents from sellers, driving portfolio prices upward to the highest bidder." Landers suggests that this phenomenon is not only dangerous for direct participants in patent monetization markets, but may have a negative secondary effect on investment in research and innovation.
To the extent that a bubble may be developing in the patent assertion area, one question is whether there is a secondary impact on investment that depends on the patent system to support research and development. Stated another way, if patents are viewed as too unpredictable to value, too volatile to incentivize investment, or too dependent on patent monetization entities for pricing norms, such a state of affairs may affect the market’s willingness to invest in the type of research and innovation that the patent system was intended to incentivize. Thus, a bursting of a patent bubble might have immediate second-order effects on the patent system more generally, or perhaps other forms of intellectual property.I find Landers' conclusions to be quite pessimistic, and suspect many will disagree with her dismal view of the state of patent monetization markets, as well as her recommendation for significant policy interventions to avoid "patent assertion valuation swings." ("At a minimum, prices paid in the price assertion markets should be cabined from affecting royalty rates used as comparators in other areas of patent law.") But the article is deeply researched, clearly argued, and characterized by a level of detail and nuance that goes beyond the skeletal version given here. I highly recommend it.