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Supporting Proposed Rules on Disclosure of Real-Party-in-Interest

Written by Professor Robin Feldman
U.C. Hastings College of Law
Posted: February 3, 2013 @ 10:30 am

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Editorial Note: What follows below was submitted by Professor Feldman pursuant to a request for comments published in the Federal Register. The deadline for receipt of written comments is Friday, January 25, 2013. 

In an efficiently functioning patent market, producers could quickly and inexpensively do the following: 1) identify which rights might be relevant to the product they wish to produce; 2) find the parties who control the interests in those rights; 3) determine the value of those rights in relation to the value off the product to be produced; and 3) secure a license with competitive terms. We are worlds away from such a system, but the Patent and Trademark Office’s proposed rules on disclosure of real-party-in-interest information would take an important step towards that vision, particularly the “broad definition” proposal. As always, promotion of an effective and efficient marketplace for innovation should be of paramount importance to regulatory agencies.

In the last five years, the patent market has undergone a change of seismic proportions. Patent rights are now regularly stripped from any underlying product and traded much like commodities in a largely unregulated market–the market for patent monetization. Prior to this time, the patent system had long operated with the comfort of knowing that more than 90% of patents would never bring any form of direct monetary return. I would refer to these as shadow rights, given that they have hovered on the periphery of the patent system, never fully actualized or fleshed out. We are now shifting to a system in which the opposite will be true–a drastic shift that is likely to have an extensive impact on innovation and the national economy. In our brave new world, large numbers of patents, that would not have garnered any direct return in the past, are being traded and monetized. Their presence in the market, particularly in the form of commoditized, tradable rights, enhances the uncertainty and game playing that may allow patent holders to obtain returns above the value of patent itself. See Robin Feldman, Intellectual Property Wrongs (describing amplification and shadow rights)(forthcoming).

Regardless of what one thinks about the causes and implications of patent monetization, it is clear that this behavior is expanding at an explosive rate. In late 2012, co-authors Sara Jeruss, Joshua Walker and I released a study identifying a sharp rise in patent monetization activity over the last five years. See, Sara Jeruss, Robin Feldman & Joshua Walker, The America Invents Act 500: Effects on Patent Monetization Entities on Litigation, 11 DUKE L. & TECH REV. 357 (2012). The work flowed from a request for data from the US Government Accountability Office (GAO), to be used in conjunction with an investigation that was Congressionally mandated by the America Invents Act. Our study concluded that the amount of patent litigation filed by patent monetization entities has increased from 22% five years ago to almost 40% in 2011. This represents a remarkable increase over a very short period of time. Although the data sample requested by the GAO was small, the indications even in that sample were striking. Whatever one thinks about this behavior there is a lot of it, and it appears to be expanding rapidly.

In this rapidly shifting landscape, it will be critical for companies to be able to keep track, not only of simple ownership of patents, but also of actual control. Information that, in theory, should be recorded is not always recorded in a timely fashion. See Tom Ewing & Robin Feldman, The Giants Among Us, 2011 STAN. TECH. L. REV. 1, at pages 4, 58 (describing evidence of parties releasing information about patents transferred to a mass aggregator with no corresponding assignment recorded in the PTO database). Moreover, the information that must be recorded in relation to a patent is highly incomplete. For example, an exclusive license may have an effect in the marketplace that is similar to a transfer of ownership, yet it might not be recorded at the PTO, and perhaps not knowable in any format. These exclusive licenses already include agencies of the US federal government, some of whom are eager participants in this brave new world of patent monetization. If nothing else, one might imagine that at least the government should be compelled to disclose the parties with whom it has bestowed exclusive rights. Other ownership and control relationships, such as a right to a return on licensing or litigation, are also difficult to determine. This information can be important in bringing to light conflicts of interest for judges and examiners. It can also be important for ensuring that companies can adequately file patentability challenges, either through declaratory judgment actions in court or through third party proceedings at the PTO.

The Xilinx case is a perfect example. Co-author Tom Ewing and I described the saga of the case in the following manner:

In the California lawsuit, Intellectual Ventures and Xilinx engaged in a battle of motions concerning whether the disclosure could be filed under seal or for attorneys’ eyes only, rather than publicly. As the parties’ motions began flying across the judge’s bench, the judge recused herself, presumably because she became aware of the identities of the interested parties, and a new judge was appointed. The new judge accepted Xilinx’ arguments and the Intellectual Ventures parties disclosed publicly a list of investors including more than 50 entities, such as the World Bank, the Mayo Clinic, the William and Flora Hewlett Foundation, and several universities.

In Xilinx, the court has now dismissed several of the Intellectual Ventures parties on the grounds that they were not the legal owners for some of the patents specifically mentioned in Xilinx’s declaratory judgment action. The legal owners for these patents include some seven other Intellectual Ventures shell companies, and the California judge has transferred this portion of the lawsuit to Delaware. So, the network of affiliated shell companies seems to have served Intellectual Ventures well in this case because its network was so vast that Xilinx did not identify the formal owner among a group of extremely related parties, allowing transfer of portions of the case to Delaware. The case is a cautionary tale for any company targeted by a mass aggregator that one should pay careful attention to who actually owns the patents being pushed in a licensing campaign, as opposed to who is doing the licensing negotiation or who may ultimately receive the funds from the licensing or litigation. See Tom Ewing & Robin Feldman, The Giants Among Us, 2011 STAN. TECH. L. REV. 1, 42-43 (citations omitted).

Finally, increased information for companies in the marketplace can reduce transaction costs for those who would like to license and increase the possibility of licensing on reasonable and competitive terms. In general, markets function more efficiently when information flows freely. We have a long way to go in the patent system, but sunshine rules, like the ones proposed for disclosure of real-party-in-interest, will be important for increasing both information and informed, competitive decision-making.

In addition to the importance for companies in the marketplace, increased information is essential for regulators and legislators. As the vast and rapidly expanding market for monetization emerges, it will be critical for government actors to understand and evaluate when the market is operating competitively and when it is not. Much of the information about this market is shrouded in secrecy, either through non-disclosure agreements or by the sealing of court documents. See Giants Among Us, supra (using public documents to locate 1,300 subsidiaries of the largest patent aggregator, a painstaking process that took years to accomplish). Nevertheless, the information that has emerged suggests that there is much troubling behavior in the marketplace, as well as great potential for anticompetitive activity. See id.; see also Intellectual Property Wrongs, supra. It will be impossible for regulators to know where the problems exist or how to address them without the passage of these and other sunshine rules.

For example, as I noted in comments at the FTC/DOJ Workshop on Patent Assertion in December of 2012, as with any market, the market for patent monetization is subject to manipulation if it is unregulated. At the moment, there are virtually no constraints if parties want to collude, divide up or otherwise manipulate that market. In fact, the market for patent monetization has arisen so rapidly, we are not yet even characterizing it as a market. Which means it looks a lot like the Wild, Wild West out there.

We have to worry about manipulations that could have anticompetitive effects in the market for patent monetization itself. We also have to worry about behavior in the market for patent monetization that could affect the underlying individual Intellectual Property markets, even in the absence of actual power in any of those individual markets. In other words, I may not need to have power in a particular IP market to affect prices in that market. It is an odd circumstance, but entirely possible in this new market.

Consider the following: I no longer need to have a basket of automobile patents big enough to constitute market power in the auto market to affect the auto market. Perhaps all I would need is a small number of patents in that market and a reputation for tough tactics. If I happen to have a large grab bag of assorted patents, so much the better. (After 50 patents, most licensing targets will cease to examine the patents on their individual merits.)

For example, suppose I have a patent related to the banking industry. My claim that this banking patent actually applies to your automobile production may be pretty farfetched. If I have enough farfetched claims to cause trouble for you, however, and I am threatening to throw them at you one after another, and I have a reputation for playing hardball, that may be enough for you to pay what I ask. It may also be enough for every other automobile manufacturer to pay what I ask, as well. Under those circumstances, it is possible that I could affect the market for automobiles without having much to speak of in the way of automobile patents.

In antitrust, big is not bad. It is what you do with your girth that matter. With this new market for patent monetization, we currently have no way to accurately measure girth and no way to know what people are doing with the girth they have. This is why sunshine rules are so critical for grappling with the market and designing the rules that will ensure a competitive marketplace.

I applaud the Patent and Trademark Office for contemplating these regulations. There is much work to be done to ensure an efficiently operating patent market in modern circumstances, but the broad definition real-party-in-interest rules would be an important step along this path.


About the Author

Robin Feldman is a Professor of Law at U.C. Hastings, Director of the UC Hastings LAB Project, and has served as the Chair of the Antitrust Section of the American Association of Law Schools. Professor Feldman’s first book, The Role of Science in Law, was published by Oxford University Press in 2009. Her second book, Rethinking Patent Law, is forthcoming in 2012 from Harvard University Press. Professor Feldman received a bachelor's degree from Stanford University graduating Phi Beta Kappa, and a J.D. from Stanford Law School, graduating the Order of the Coif and receiving the Urban A. Sontheimer Award for graduating second in the class.

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  1. Perhaps I am a bit too jaundiced from all of the spin that I see in the patent world (the nonsense driving the AIA can do that), but I am more than just a little skeptical that any “solution” being offered is legitimate when the problem is marginal and the “solution” actually helps to weaken intellectual property rights.

    When I see an argument constructed as in this article, red flags are raised. What troubles me most is that the very legal nature of patents seems to be purposefully ignored.

    Patents – by law – have the attributes of personal property.

    Yes, they do affect the public, but that makes them no less personal property. There are systems in place, with suitable encouragements, that those who so choose to use can use and make their ownership public knowledge. In fact, in order to actually enforce patent rights, the court system currently REQUIRES that the true party-in-interest is identified (this is actually captured in the article in the “boogeyman” scare story, which points out the opposite premise of the author – that adequate safeguards are in place).

    As I read the article, it sounds good, but it also sounds ‘too” good. Who could argue with wanting to find the right party in order to see if you can strike a deal?

    How about the owner of that property?

    If that owner does not want itself to be so openly known, isn’t that a right of that owner? Would the author want full disclosure of every piece of their personal property catalogued and open to anyone who may be interested in “striking a deal?”

    Subsumed into the article is a presumption that the owner does not have a right to NOT provide their identity.

    Excuse me please, but that is a proposition that needs a little more support than a slick “wouldn’t it be nice” rosy glass view of the world. Also subsumed in the argument is just what is meant by an efficient marketplace in the line: “As always, promotion of an effective and efficient marketplace for innovation should be of paramount importance to regulatory agencies.” In the business world (and the legal world of contracts), the notion of efficient breach comes to mind. In that world, we want to be able to breach contracts and do so effectively. I would hold that that type of thinking does not – and should not – translate to the world of intellectual property in an “as always carte blanche mindset. I would put forth that the holder of the property should have first control over any such “efficient breach.”

    A couple of other red flags from early in the article:

    Patent rights are now regularly stripped from any underlying product and traded much like commodities in a largely unregulated market—the market for patent monetization.
    – this is made to sound like a bad thing.

    the comfort of knowing that more than 90% of patents would never bring any form of direct monetary return.
    – this is made to sound like a good thing.

    Excuse me again, but I think that these two things are 180 degrees out of alignment. In fact, what the author calls “shadow rights” and a implied “bad” expansion of rights is actually nothing more than a more fulfilling obtainment of rights that were always supposed to have been there, and that are simply more efficiently being optimized.

    Those who believe in rewarding innovation should not be taken in by the slick premise – what is being espoused here is inimical to the innovation community and such is being dressed in sheep’s clothing. As Gene has more than once noted, true innovators have nothing to fear from duly granted patents. Quite in fact, it is those that do not innovate – that want to copy – that seek out to denigrate and weaken IP protection. What the author purports to be an “extensive impact on innovation” is actually simply a negative impact on copiers – particularly large scale “Big Corp” copiers, who would like nothing better than to be able to look at exactly who owns what and on that basis decide whether they could bury the patent owner with their might and size, or whether, since the patent holder is an unknown entity, that they must instead “play nice.” What “informed, competitive decision-making” translates to is efficient breach by those who feel they could get away with it.

    It is in line with a common misperception about “trolls,” and the good that trolls bring to the real world patent marketplace – the ability to defuse the Big Corp large-scale patent portfolio Armageddon option.

    It is also in this view that the slick turn of phrase used by the author “Information that, in theory, should be recorded is not always recorded in a timely fashion. begs to be taken as a fait accompli.

    In whose theory, might I ask?

    Certainly not my theory, nor my understanding of personal property. Sorry – but no, there is no such theory under our current laws that I can subscribe to. Quite in fact, the assignment recording function in the PTO database is expressly non-mandatory, and thus in PROPER theory, “should” is necessarily deceptive.

    I find the “patent in the banking industry” hypothetical without merit. “Tough tactics” and “large portfolio” are not only bandied about as some sort of excuse from due diligence, but no link whatsoever is provided to the proposed solution. Quite in fact, the current “not divulging ownership” works directly against this strawman.

    The kernel of truth” In antitrust, big is not bad. It is what you do with your girth that matter[s]” is quite separate from the forced listing of ownership of personal property.

    I reject the Patent and Trademark Office for contemplating these regulations. There is much light that needs to be shed on what they really mean as to “efficient breach” and, like the AIA, which entities would actually benefit from such forced conscription.

  2. I would further add another bit of slick misdirection:

    The stated premise is based on a foundation of “In an efficiently functioning patent market, producers could quickly and inexpensively do the following:” (emphasis added)

    It slipped by me several times, but what is this lead-in statement actually saying?

    It is denying the very essence of what a US Patent is. A US Patent is a negative right – not a right to produce. But subtly switching the emphasis to “producers” the special treatment is switched from those that innovate to those who desire to use that innovation regardless of who actually came up with it. In other words: copiers.

    This is basically a chapter out of the book for Infringers’ Rights. The wolf is carefully hidden, but it is still a wolf.