Defensive and offensive acquisition services in the market for patents

We theoretically and empirically examine recent business models of defensive and offensive patent trading by specialized service firms also called non-practicing entities (NPEs). We develop a theoretical model of competition between NPEs and operating firms to win a patent auction, wherein operating firms have private information on their exposure to infringement. We show that an offensive NPE can nevertheless outbid operating firms due to a greater ability to extract damages from infringers. Defensive acquisition services yet obtain even better results by using a combination of private information aggregation and catch and release strategy to preempt the most valuable patents. Using patent reassignment and litigation data, we then provide evidence that patents acquired by defensive entities are significantly more valuable than patents acquired by offensive NPEs (patent assertion entities). We also find clear evidence that defensive NPEs do implement the catch and release policy in practice.