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How Much Money Do Consumers Really Pay For Patent Royalties?

June 1, 2014 - Written By Ray Greer

Patent disputes have become almost the trendy thing to do for some OEMs. After months of in court discussions, they usually end with a hefty bill to the losing party. Costing some OEMs billions of dollars, but that money has to come from somewhere. Have you ever wondered just how much of that money is coming from your pocket? Well thanks to a paper published by two of the Apple lawyers and the Intel Vice President(Joe Mueller, Tim Syrett from Apple and Ann Armstrong of Intel) we now have actual numbers.

2013 has come and gone, but the effect of patents in that year has well surpassed that of the year before. In fact, for the last three years, we have reached record levels of patent lawsuits between companies. In 2012 there were 5,418 new lawsuits filed between companies, then in 2013 there was a 12.4 percent increase in that number bringing the new record number to 6,092. These numbers were brought together by Lex Machina, and have brought more attention to the debate concerning patent reform in the White House. All of these lawsuits have been filled by and against many OEMs and interestingly enough, most of them were filled in East Texas and Delaware.

On the side of companies that have become known as “Patent Trolls” and more than likely, you have never heard of these companies. Topping the list is a company by the name of Melvino Technologies, with Wyncom and Thermolife International following closely behind. The reason you may have never heard of these companies is because their business is strictly patent litigation. In 2013, Melvino Technologies filled 137 patent lawsuits, Wyncom had 131 filled and Thermolife filed 117 patent lawsuits-the full chart is below. As for locations, Texas and Delaware held 46 percent of lawsuits filed in the US. Though you may have noticed neither of those two states are places where tech companies live. The reason for patent trolls filing and basing their companies in Texas and Delaware, is because of their “plaintiff friendly jurisdictions”. For a complete breakdown of locations, refer to the chart below.

While there are companies that filed the most lawsuits in 2013, someone was on the other end of those lawsuits. Topping the list of companies that have had lawsuits filed against them is Apple. Apple had a total of 59 patent lawsuits filed against them in 2013, Amazon came in second with 50 and AT&T in third with 45 lawsuits filed against them. However, each lawsuit filed may not have been heard about since they reached settlements outside of court. Preventing us from seeing the litigation inside a courtroom. To see where Google landed on that chart refer to the image below. While the rate of patent lawsuits builds, we wait for the US Government to take a stance and make some changes.

The Senate is currently sitting on a bill that is said to reform patent laws in the US, while it has already passed through the House of Representatives. The last time we saw a change in this area was in 2011, with the America Invents Act(AIA)-which became law. The AIA changed some major aspects to patent filing. One of which was the “first to invent” filing system. That meant, even if you didn’t file right away, if you could prove you invented it first, you could file. However, that changed to a “first inventor to file” filing system which is self explanatory. these changes went into effect on September 16, 2012. With all the attention patent lawsuits have received recently, the bill is sure to get plenty of attention. In the meantime while OEMs are paying billions of dollars in settlements and courtroom loses, it is the consumer is really paying.

In the paper published by Mueller, Syrett and Armstrong, they tell us exactly how much of those billions is coming from the customers. Breaking it down to a very easy to understand way, they say that when you buy a device for $400, around $120 of that is going to patent royalties. That means that 30 percent of the cost of a smartphone is due to patent royalties and not the actual device. This also means that the 30 percent of a smartphone’s cost, isn’t going to the OEM that you purchased the device from. In fact, it was reported that last year, Microsoft made $2 billion in revenue from Android patent royalties. To break it down even further, that means any OEM producing an Android device, had to give around $5 to $10 per device sold to Microsoft. Which also means that if it wasn’t for those patent royalties, Microsoft would likely have lost $2.5 billion last year.

Does this mean that if patent reform happens we will see lower prices on smartphones? More than likely not, at least for quite sometime, if at all. We will still be paying that extra cash thanks to patent lawsuits. Just another reason to get upset about patent trolling and lawsuits in the tech industry.