Non-practicing Entities Research Articles

Patent Assertion Entities (PAEs) Under the Microscope: An Empirical Investigation of Patent Holders as Litigants

There is tremendous interest in a certain type of patent litigant — the often-called non-practicing entity (NPE), patent assertion entity (PAE), patent monetization entity (PME), or simply patent troll. These NPEs are the subject of a recent GAO report, a possible FTC investigation, pending legislation before Congress, and even comments from the President of the United States. All of this commentary and activity centers on whether NPE participation in patent litigation, and the patent system in general, is detrimental or beneficial to society. But the fundamental barrier to understanding the current debate is the lack of granular and transparent data on NPE litigation behavior. Accordingly, we personally hand-coded all patent holder litigants from calendar years 2010 and 2012, and we are releasing this data to the public. In our coding, we drill down and finely classify the nature of the litigants beyond the simple NPE or non-NPE definitions. Releasing this data to the public that unpacks the definition of NPE can provide better illumination to policy makers, researchers, and others interested in the patent litigation system. The data reveals a much lower percentage of litigation brought by patent holding companies than other studies, finding no explosion in NPE litigation between 2010 and 2012. Instead, we find that most differences between the years — an increase in the number of patent holding companies and individual inventor suits — is likely explained by a change in the joinder rules adopted in 2011 as part of the America Invents Act.

Current Proposals to Amend U.S. Patent Law

This Briefing Paper was produced in conjunction with the American University Washington College of Law Patent Policy Forum being held on Nov. 8, 2013. The Forum will explore current proposals to amend U.S. patent law to address issues surrounding non-practicing entity (PAE) litigation, software and business methods patents and standards-essential and FRAND-encumbered patents. The Briefing Paper summarizes the legislative and administrative proposals that are currently on the table in each of these areas, and is intended to be a springboard for informed policy discussion.

Trolls and Other Patent Inventions: Economic History and the Patent Controversy in the Twenty-First Century

The most significant changes to the patent and innovation system in the past two centuries have been, or are in the process of being, implemented in the United States today. Critics of patent grants and intellectual property institutions propose alternatives such as unprecedented constraints on the rights of patent owners, and many advocate the award of technological prizes as superior alternatives. Such proposals are motivated by claims that the patent system is in crisis, with new developments that require departures from traditional approaches to property rights and technology policy. The historical record sheds light on the nature and validity of these controversies. In particular, data on patents granted, litigation rates over the past two centuries, and the role of non-practicing entities, indicate that these features of the current market in intellectual property are hardly anomalous. Indeed, they have been inherently associated with disruptive technologies that transformed the United States into the world leader in industrial and economic growth. By contrast, extensive empirical analyses of prize systems in Europe and the United States explain why early enthusiasm about such administered nonmarket-oriented awards had waned by the end of the nineteenth century.

Trademark Extortion Revisited: A Response to Vogel and Schachter

Trademark bullying (a.k.a. trademark extortion) is a very controversial notion in trademark litigation in the United States. There, for sure, is a lot of illegitimate trademark infringement happening. Anecdotally, we also know that trademark holders often overstep in the assertion of their otherwise legitimate rights. For the first time, this article documents how large a problem trademark bullying is and how often it happens. Trademark bullying occurs when there is evidence that a trademark holder asserts a non-famous mark against a non-competing entity on or in connection with goods or services into which the plaintiff has no reasonable expectation of expanding. Trademark bully occurs in at least 5.5% of the reported cases. This is the same rate that plaintiffs recover any money damages. In the reported cases, trademark bullying is as statistically significant and relevant as cases where the plaintiff recovers money damages. Also, 5.5% is a floor. Trademark bullying happens at least 5.5% of the time. As there is no reporting or recording requirement in the United States, trademark bullying, if it happens at all, can only be found if we use deductive reasoning. This article is based on the deductive notion that cases where summary judgment was granted for the defendants are likely to manifest trademark bullying and it is appropriate to label them as such. In trademark bullying cases, the quality of the plaintiff’s claim is declining. This conclusion is supported by regression analysis that indicates that it is accurate to over 99% certainty. That is, plaintiffs are bringing claims that are less and less likely to succeed on the merits if tried. As no data (just suppositions) was provided by Vogel and Schachter, it is difficult to claim they are wrong in their analysis. Of course, Rule 11 and the other potential sanctions do exist. With this study, we now know that no Rule 11 sanctions were ever applied to any trademark bullying case. Further, no data is relied on by the various trade organizations (simply outdated dicta from now ancient cases). The data here is the first attempt to prove or disproved trademark bullying. It is provided in the spirit of an academic inquiry. To me, the data here supports the idea that trademark bullying deserves the scrutiny that would be brought to bear if Congress elected to get involved. Clearly, the existing “safeguards” have been proven here to be anything but safe. If non-practicing entities is a matter worth the time and energy of States and Congress, then trademark bullying is as well as both involve entities which upset natural markets for and with intellectual property. As such, Congress should act. Congress could go a long way in stopping trademark bullying if it amended Section 1117 of the Lanham to make it explicit that trademark infringement defendants as well as plaintiffs should be awarded its attorney’s fees when the opposing party acts egregiously. Attorney’s fees should be liberally awarded in cases where the defendant moves for summary judgment and prevails as these cases are the clearest manifestation of trademark bullying.

Removing the Troll from the Thicket: The Case for Enhancing Patent Maintenance Fees in Relation to the Size of a Patent Owner's Non-Practiced Patent Portfolio

The legal literature is replete with discussions of the problems caused by large patent portfolios. While the strongest complaints are about non-practicing entities, or “trolls,” suing in the software and high-tech industries, large patent portfolios can cause competition and gridlock problems even when held by active industry participants. As has been well documented, many of the problems arise from the fact that patent boundaries and validity are often uncertain. Moreover, because assignments of patents need not be registered, and because trolls often use multiple shell companies, it is often difficult to know who owns what patent, or how many patents a particular entity owns. Thus, not only must innovators and firms worry about the size of patent portfolios in the hands of their competitors and trolls, but, even if they are willing to spend substantial time and effort, they may not be able to know all of the potential patent liability they may face, and from whom. It is proposed that patent maintenance fees be increased according to a sliding scale tied to the number of non-practiced patents a patent owner has in its portfolio. Thus, as the size of a firm’s patent portfolio increases, so too does the maintenance fee multiplier charged for all its patents, beginning with the second maintenance fee due date. All patents with common ownership interests would be aggregated in determining the fee enhancement. Because the enhanced fees do not kick in until 7.5 years after issuance, incentives to invent and to disseminate should not be significantly reduced. This proposal will encourage large patent portfolio holders to pare down their holdings by determining which of their older patents are not worth maintaining. This will benefit competitors and new inventors who are currently subject to hold-up problems from large portfolios — many of which are particularly caused by old, low-value patents held en masse.

The Eff ect of Non-Practicing Entities on the Rate of Innovation

We analyze the effect of Patent Assertion Entities (PAEs) on the innovation incentives of producing firms. Before producing, these firms engage in sequential patent races to discover and patent the components needed for the final product. We characterize the equilibrium of a model that incorporates patent trade, entry, licensing, litigation, and injunctions. In our model, only producing firms can obtain injunctions, which reduces the incentives of producing firms to sell patents to PAEs, because the latter cannot exclude rival firms from the market. We show that PAEs can increase the marginal value of patenting a discovery, but they can also act as an entry deterrent. As an extension, we study patent trade among producing firms and a third party that can decide to enter the market and produce.

Picking out the bad boys

We live in a topsy-turvy world in which things have a habit of changing. Forty years ago, back in the early 1970s, it was unthinkable that the mighty edifice of the Soviet Union might crumble, that same-sex marriage might be legitimized, that a Pope might be elected from outside Italy or that China might be out-competing her western competitors in the free market. Popular songs still recognizably had words, telephones were attached by wires to unmoving sockets, a long-playing gramophone record offered the convenience of 20 minutes or thereabouts in listening time before it required attention and most people still depended for their news on the publication and purchase of daily newspapers. In intellectual property terms, it may appear that there have been far fewer changes, and the changes which we have seen have been far less radical. The major moves towards harmonization and closer co-operation between nations from which we now benefit were either in their prototype phase or at any rate on the agenda four decades ago, and commercial activities such as brand licensing, business format franchising, character merchandising and technology transfer were not markedly different from the form they take today. Likewise, in the field of dispute resolution, the reform of tortuously slow and undesirably expensive litigation has taken place at a snail’s pace and, while arbitration and mediation may become more or less fashionable, they are not radically different now from the form they took in 1973. There is, however, one area in which change has been substantial: that is in our characterization of ‘good guys’ and ‘bad guys’. Back in 1973, it was easy to identify each, and our sympathies lay, quite properly, with intellectual property owners as the ‘good guys’. Was it not they who fought, tirelessly and at great cost, to stem the tide of counterfeit and infringing products? Was it not they who ploughed their resources, their effort, their vision into the development of new products and services and the creation of entire new industrial and commercial sectors? How things have changed! Within almost every field of commercial endeavour, the IP owners are on the defensive. Pharmaceutical companies, once praised for their fight against illness and disease, are now castigated as profiteers who play to the ailments of the rich man’s world while neglecting the conditions suffered by the poor in developing nations who cannot afford their products; they are also excoriated for seeking to prevent the free movement of goods between countries in which they have no patent protection. Owners of brands for consumer goods are held responsible for the often unspeakable and dangerous conditions in which labourers toil to make their products. Copyright collecting societies are condemned for seeking to extract unreasonable royalties for the use of their members’ works, notwithstanding the sums actually received by their members. And now patent owners face the wrath of President Barack Obama if they fit the description of ‘non-practising entities’, better known by their derogatory label of patent trolls. Meanwhile, things are looking up for infringers, if they are not quite everyone’s darling, nor are they the bogeymen they once were. Suppliers of counterfeit products to poverty-stricken African jurisdictions are seen as providing a welcome service to the consumer who cannot come close to affording the ‘real thing’. Traders in grey goods are viewed as merely taking advantage of the competitive conditions of the free market, even if the goods in which they trade do have an unfortunate habit of entering markets for which they were destined, should the IP owner take his eye off them. Copyright infringement in the era of the internet has almost become a duty and the notion that the law should be changed to reflect what people actually do—a notion that would seem preposterous in many other fields of human conduct—is openly discussed and endorsed. The clock cannot be turned back. Nor can we reject the new technologies that have brought us so many benefits. However, we should ask ourselves why, as a society, so many of us appear more preoccupied with the alleged sins of the intellectual property owners who have brought us so many benefits, rather than condemn and seek to eradicate the harmful conduct of those whom the law classifies as infringers.

Patent Enforcement: A Review of the Literature

Without the confidence that patent rights can be enforced quickly and efficiently, when needed, the patent system will not stimulate innovation. For this reason, governments, academics, international institutions and the private sector have poured significant resources into gathering and analyzing statistics on patent enforcement over the last two decades. This paper reviews these studies and finds that while infringement is relatively common, much enforcement occurs informally and less than 1-2 percent of patents incur litigation. New strategic uses of the enforcement system, especially by non-practicing entities, is the major emerging enforcement issue, especially in the United States. While the old problem of litigation costs attracts the lion’s share of empirical attention, it has produced remarkably few solutions to date.

PATENT ENFORCEMENT: A REVIEW OF THE LITERATURE

AbstractWithout the confidence that patent rights can be enforced quickly and efficiently, when needed, the patent system will not stimulate innovation. For this reason, governments, academics, international institutions and the private sector have poured significant resources into gathering and analysing statistics on patent enforcement over the last two decades. This paper reviews these studies and finds that while infringement is relatively common, much enforcement occurs informally and less than 1–2% of patents incur litigation. New strategic uses of the enforcement system, especially by nonpracticing entities, are the major emerging enforcement issue, especially in the United States. While the old problem of litigation costs attracts the lion's share of empirical attention, it has produced remarkably few solutions to date.

An inside view to non-practicing entities business models: a case study

While patents have been essential to the business models of many firms for a long time, it is only in recent years that there has been a renewed interest in how patent exploitation and enforcement may be used as an autonomous business model to generate revenues and competitive advantages. Non-practicing entities (NPEs), entities which purchase or acquire patents only to enforce them to generate revenues, have taken advantage of a business opportunity in creating various business models centred solely on the exploitation and enforcement of patent rights. However, few empirical studies have been conducted on how NPE business models precisely function, likely due to the private nature of such entities and their strategic patent transactions. This study aims to further our knowledge on the NPE phenomenon by providing a unique glimpse into the method of operations of six NPE business models and how they engage in the strategic management, exploitation and enforcement of patent rights.

How PTO Fees Could Decimate Patent Trolls

Citing empirical evidence that non-practicing entities assert relatively old patents that cover inventions in relatively fast-paced industries, this essay argues that the PTO should increase the number and magnitude of renewal (maintenance) fees in order to hasten the expiration of suspect software patents and reduce the prevalence of suits filed by so-called patent trolls.

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

“Nonpracticing entities” (NPEs) own patents but do not practice the patented technologies. They are sometimes referred to as “patent trolls,” who hold up practicing companies to seek exorbitant payments. This paper conducts a review of the theoretical literature, which is inconclusive on whether NPEs have been systematically overcompensated. This study offers the first empirical study in license royalty rates, and its econometric analysis demonstrates that NPEs have not been overcompensated in license markets, regardless of whether other relevant variables are controlled. This conclusion is then put back into the larger context of NPE economics to lay out topics for further research through cross-examining other major conclusions in this field.

Markets and Patents Enforcement: A Comparative Investigation of Non-Practicing Entities in the US and Europe

Is it true that non-practicing entities (NPEs) are primarily a U.S. phenomenon? Over time, several definitions of NPEs have been presented. They range from research institutions that hold patent portfolios for their inventions but do not develop and commercialize any products, to IP asset management firms whose exclusive business is asserting patent claims to collect significant fees from companies operating in certain industries. The latter are also referred to as “patent trolls” and have been the subject of significant debate as to their role in the innovative process in different fields. NPEs are a relatively new phenomenon. Studies have shown that their activity has only become prominent in the United States during the last decade. And these studies have suggested that NPEs are not nearly as active in other countries, namely European countries. Nevertheless, no prior research has attempted to quantify the extent of the international NPE problem nor find possible explanations for the difference. This article investigates whether NPEs are indeed less active in Europe. Interestingly, the findings indicate that NPEs are present in Europe, but their operations there are minimal compared to their operations in the United States. This article discusses possible explanations for this finding, including a comparative analysis of key differences between European and US industries, remedy systems, and judicial cultures. This article demonstrates that NPE activity in Europe is more depressed than in the United States because the affected industries–electronics, machinery and computer equipment, software and communication–are smaller in Europe than on the other side of the Atlantic Ocean. It also shows that NPEs operate in Europe DESPITE the presence of certain features of local legal systems – such as fee-shifting - that advocates of patent reform have recommended for adoption to control NPE activity in the United States. Consequently, this article questions the supposed effects of those proposed reforms. Finally, this article cautions against reforming the current U.S. patent system to make it more similar to European ones, as the European industries targeted by NPEs are less prosperous than their US equivalents. The impact of these proposed reforms on the activities of PRACTICING entities has not yet been adequately questioned. Even the question of whether NPE activity is in fact harming innovation has not been conclusively answered. Thus, much more investigation is necessary in this field before it would be wise to reform the patent system.

Analyzing the Role of Non-Practicing Entities in the Patent System

Currently, there is an important debate about the role of non-practicing entities in patent litigation. People are asking: what are the costs and benefits associated with NPE litigation? Are they too high, too low, or just right? This paper makes two contributions to the discussion. First, we review a recent study, Direct Costs of NPE Disputes, by James Bessen and Michael J. Meurer. The study presents new data on the litigation costs and settlement expenses incurred by a subset of defendants in NPE cases. Some of their findings are provocative, but we find their methodology to be deficient in several respects, which limits the usefulness of the data and thus the implications that can be drawn from them. We also offer suggestions for future research on NPEs, including data collection and analysis. Second, we argue that the study asks the wrong question. The debate should be reframed to focus on the merits of the lawsuits, including patent system changes focusing on reducing transaction costs (e.g., lawyers’ fees) in patent litigation, instead of focusing solely on whether the patent holder is a non-practicing entity.

The Direct Costs from NPE Disputes

In the past, “non-practicing entities” (NPEs), popularly known as “patent trolls,” have helped small inventors profit from their inventions. Is this true today or, given the unprecedented levels of NPE litigation, do NPEs reduce innovation incentives? Using a survey of defendants and a database of litigation, this paper estimates the direct costs to defendants arising from NPE patent assertions. We estimate that firms accrued $29 billion of direct costs in 2011. Although large firms accrued over half of direct costs, most of the defendants were small or medium-sized firms. Moreover, an examination of publicly listed NPEs indicates that little of the direct costs represents a transfer to small inventors. This updated version of the paper includes a reply to critics.

An Early Response to a Recent Proposal for a Defensive Patent License (DPL)

Jennifer Urban and Jason Schultz have proposed a Defensive Patent License (the “Original DPL”). The Original DPL is essentially a standardized, networked, non-negotiated, portfolio-wide, royalty-free, patent cross license. The Original DPL takes advantage of the fact that certain companies and many individuals are primarily interested in pursuing patents for defensive purposes, e.g., to achieve freedom to operate. In this article, we focus on the perspective of a substantial portfolio company (an “SPC”) and we suggest modifications to the Original DPL that may make SPCs more willing to participate in it. After a brief summary of the Original DPL, we describe the advantages of a robust DPL if successful – i.e., if the DPL is reasonably widely adopted, at least by one industry. We then describe our suggested modifications making reference to a model Modified DPL; a primary suggested modification provides that, if a member withdraws, the withdrawing member’s license is automatically revoked, both inbound and outbound, at the end of a withdrawal notice period. We discuss potential criticisms of the Original DPL and Modified DPL and end with a brief comparison of the Modified DPL to the standardized, networked, royalty-free, patent license provided by the Open Invention Network. Appendix I provides a model Modified DPL that reflects our suggested modifications. Appendix II includes some additional/related ideas for potential further modification/supplementation of the DPL idea that are not reflected in the model Modified DPL set forth in Appendix I. For example, in modification 10 of Appendix II we note that instead of (or as a precursor to) the Modified DPL, companies could join a License On Transfer (LOT) agreement. Under the terms of the LOT agreement, every LOT User agrees that when it transfers a patent, the transferred patent automatically becomes licensed to the other LOT Users existing at the time of the transfer, except (i) a transfer that is part of a legitimate spin out or of a Change of Control to a Non-Assertion Entity or (ii) a transfer to another LOT User. The license would be subject to defensive termination. Such an agreement, i.e., a License On Transfer (LOT) agreement, would protect companies that sign the agreement from the extraction of patent rents by an entity (e.g., a non-practicing entity) to which the patent is sold. Appendix III provides a model LOT agreement.

DIMINISHING THE ATTRACTIVENESS OF TROLLING: THE IMPACTS OF RECENT JUDICIAL ACTIVITY ON NON-PRACTICING ENTITIES

The United States patent system has increasingly been faced with complications presented by a type of non-practicing entity known as ‗patent trolls‘—patent owner entities that do not actively innovate, develop or manufacture patented material but instead seek to profit from patent ownership through licensing agreements and litigation. This article explores arguments on both sides of the non-practicing entity debate and evaluates perceptions of this activity as both an accessible secondary commodities market and a litigation-based business model.

Law and Economics of Litigation: New Insights from Patents

We study how patent, rm and judge characteristics influence the duration of patent disputes. We derive hypotheses from a theoretical framework and test the predictions using a hand-collected dataset on patent litigation. We show that the value of a patent increases the duration of a case, while lower uncertainty, measured by judge experience and patent characteristics, decreases the duration. The presence of large fi rms has a positive influence on the settlement time. Contrary, non-practicing entities, often referred as patent trolls, reduce the settlement time. The results give further insights to the analysis of patent litigation but also to litigation in general.

Purging Patent Law of ‘Private Law’ Remedies

This paper rejects the fundamental premise of patent law remedies that courts should always attempt to restore the status quo ante by making the patentee whole in the event of infringement. Instead, the patent system and its associated remedies should be viewed as part of a public regulatory regime designed to further the societal goal of optimizing innovation incentives. Such an approach mandates significant changes in the structure of patent remedies. For example, when the patent-in-suit covers a minor component of a complex product, I argue that injunctions and make-whole damages should not just be denied to non-practicing entities (NPEs) -- as prior scholars have argued -- but to practicing entities as well. In contrast, courts should generally award more than make-whole damages in cases involving difficult-to-detect infringement. More fundamentally, the damages and injunction provisions of the Patent Act -- which derive from a private law foundation -- should be jettisoned in favor of remedies that directly promote optimal innovation incentives.

The Private and Social Costs of Patent Trolls

In the past, non-practicing entities (NPEs) - firms that license patents without producing goods - have facilitated technology markets and increased rents for small inventors. Is this also true for today’s NPEs? Or are they “patent trolls” who opportunistically litigate over software patents with unpredictable boundaries? Using stock market event studies around patent lawsuit filings, we find that NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010, mostly from technology companies. Moreover, very little of this loss represents a transfer to small inventors. Instead, it implies reduced innovation incentives.