LOT Network surpasses 275 members, fighting PAE patent litigation

By Steve Brachmann
August 27, 2018

Patent license agreementIn early August, the cross-blockchain protocol developer Peer Mountain announced that it had joined the License On Transfer (LOT) Network, an organization founded in 2014 through collaboration between Internet giant Google, multinational electronics firm Canon and open source provider Red Hat. LOT Network markets itself as a non-profit consortium, which offers its members a legal mechanism affording them protection from patent assertion entities (PAEs) and immunizes its members against patent suits from non-operating entities for about 1.2 million worldwide patent assets currently owned by LOT members.

Ken Seddon, the CEO and president of LOT Network, told IPWatchdog that members sign the exact same 10-page agreement, which attaches a non-exclusive conditional license to that company’s patents. This license protects other members in the event that one of the patents to which the license is attached ever becomes owned by a patent assertion entity (PAE), thereby preventing the PAE from asserting the patent against LOT Network members.

“Think of it as a fuse attached to a patent,” Seddon said. “While the patent is owned by an operating company, all the traditional uses of patents are fair play. It’s a live patent that can be asserted against anyone inside or outside of the network. But, if it ever falls into the hands of a PAE down the road, then the fuse blows and the patent becomes disabled against other companies which were members of LOT at the same time that the patent was in the Network.”

The LOT Network conditional license only applies to patents that are in network at the time that a firm joins the consortium. If a business joins LOT after a LOT member sells a patent, previous LOT members are protected by the conditional license whereas the new member still faces the potential of an infringement suit down the road on that patent.

According to Seddon, LOT Network was created as an industry solution to the issue that some companies were having with patent lawsuits from PAEs. “From 2002 to 2011, U.S. patents were extremely strong. Reform from both legislation and the courts has created much uncertainty in the patent system, impacting the value of patents today. The irony of the PAE issue is that companies only have themselves to blame. Eighty percent of the patents used by PAEs came from operating companies. Instead of relying on Congress or the Supreme Court to solve this problem, LOT member companies are taking responsibility for solving this issue.”

[[Advertisement]]

Of LOT Network’s more than 275 members, one-third of the network’s membership consists of startups who make less than $25 million in annual revenue. Given the encumbrance that membership in LOT places upon the patents of network members, it would seem a little strange that so many startups have elected to join the consortium as the conditional license effectively forecloses upon options that a startup would have to sell their patents to a PAE if they exit the market.

“The number one reason not to join LOT is because a company values selling to PAEs more than it values optimizing for success through risk reduction,” Seddon said. “Basically, to find out whether LOT is right for your company, it comes down to whether you’re optimistic about your future.” He was also quick to point out that, over the past year, all of the publicly traded companies who are members of LOT outperformed the S&P 500 by 90 percent, although it’s not likely that many of those publicly traded companies are startups.

Seddon argued that the patent encumbrance that comes with LOT membership has a de minimis negative impact on the patent’s value, pointing out the declining street value for patent sales in recent years. He points out that the average price per patent paid by risk management services provider RPX Corporation was $43,000 in 2015, down from a high of $201,000 per patent on average paid by RPX in 2012. Normally, companies don’t seek to take on an encumbrance on their patents. Since no one has ever left LOT, Seddon suggests that members believe they are receiving more value than they are giving up.

The definitions of certain types of firms in the patent world tend to shift depending on who uses them but the LOT Agreement defines a PAE as any firm that earns 50 percent or more of its annual gross revenue from damages awarded through patent litigation. However, LOT Network doesn’t count damages earned by an operating company suing a competitor offering an infringing product.

“We believe in the normal and traditional use of patents,” Seddon said, adding, “that just because a company is a member of LOT, doesn’t mean that they can’t bring an infringement suit against another LOT member.” He noted that the consortium includes members who have recently been adverse in litigation, such as Waymo and Uber or Cisco and Arista. “Let’s say that you’re an autonomous vehicle startup and you file a patent infringement suit against one of the big OEMs,” he said. “Whatever the startup receives in litigation doesn’t get counted as assertion revenue towards classification as a PAE. As a startup, you can go after your competitors if they take your invention.”

LOT Network’s use of the term “patent troll” is likely to rankle many readers given the derogatory nature of that term and the fact that even the Obama-era Federal Trade Commission determined that term to be overly prejudicial. Asked why LOT uses the term, Seddon said that the organization understands the pejorative nature of the term, but it also recognizes that most startups coming to the website are able to connect with that term over PAEs. “We don’t mean to judge in any way what is good behavior and bad behavior,” Seddon said. “What we want as a community is a strong patent system that rewards investments, rewards capital and has certainty.” According to Seddon, the 10-page agreement signed by LOT members does not include the term “patent troll,” although the term is widely used in the organization’s promotional materials.

LOT Network is currently incentivizing startups to join the organization through a patent donation program which offers three patents free to newly joining members with another two patents available through referrals. Seddon added that the organization is also currently looking at developing a program that will benefit universities which have shown an interest in joining LOT. “We want to figure out the most authentic and sincere way to help universities,” Seddon said. He noted that LOT has never considered universities to be patent trolls given that those entities are likely to generate far more revenue from tuition and sponsored research than they’d ever earn from litigating their patents in court.

The Author

Steve Brachmann

Steve Brachmann is a writer located in Buffalo, New York. He has worked professionally as a freelancer for more than a decade. He has become a regular contributor to IPWatchdog.com, writing about technology, innovation and is the primary author of the Companies We Follow series. His work has been published by The Buffalo News, The Hamburg Sun, USAToday.com, Chron.com, Motley Fool and OpenLettersMonthly.com. Steve also provides website copy and documents for various business clients.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 7 Comments comments. Join the discussion.

  1. Anon August 27, 2018 11:13 am

    The amount of loaded rhetoric (and self-defeating spin) is massive.

    Anyone considering joining such a group should take the time to unwind this rhetoric.

  2. Jianqing Wu August 27, 2018 4:42 pm

    PAE practice is a complication caused by the court enforcement model and a body of absurd case laws: hundreds of conflicting and consistent doctrines. Most of the laws have developed by taking advantages of technicalities, imaginary subject dividing lines, LEGAL theories (not scientific theories), unrealistic presumptions, partial facts…. The biggest flaw is the attempt to elevate accuracy from a statutory binary-accuracy scale, to ill-defined doctrinal standards, to final hair-splitting absolute accuracy. The courts are responsible for creating a litigation landscape where five to tens of times of spending is normally required to decide any dispute. Patent litigation becomes the worst among all areas of law because inventions touch complex technologies.

    The prevalence of PAE practices is natural and inherent response to such a failed justice system. PAE has become an essential element for independent inventors who cannot use their own inventions. They can also help operating companies to realize patent values.

    The LOT does nothing to fix the litigation problem, but creates a climate which will slowly wipe out PAE activities. I predict that it can have adverse impacts.

    “Agreement defines a PAE as any firm that earns 50 percent or more of its annual gross revenue from damages awarded through patent litigation. However, LOT Network doesn’t count damages earned by an operating company suing a competitor offering an infringing product.”

    This kind of arrangement would create a landscape that severely discriminates against PAEs based upon patent holders ability to use inventions and PAE’s sources of revenues. PAEs get patents primarily from two sources: failed companies and non-practicing independent inventors. Since fewer patents can be sold by failed operating companies to PAEs, PAEs will slowly disappear. When there are few PAEs that can help independent inventors, independent inventors cannot realize values for their inventions.

    Some day, inventor, John Doe, will have to spend several millions to bring his patent claim by himself and a court might find him liable to a patent infringer.

    This LOT practice provides an incentive to only inventions that can be USED by inventors or patent owners. It thus favors improvements in technologies, perpetuates corporate monopoly, promotes technologies of low productivity, and selectively retain bad business methods. A typical person is good in only one field in a space involving N-1 fields, it is far less likely for the person to use any invention in the N-1 fields. Few people can USE inventions in this technological era even in their competent field. So, anyone who has disruptive concept that is beyond his ability to use will be discouraged to reduce to practice for his concept. The practice will discourage inventive attempts by all population in all fields.

    When a large number of businesses regulate their own conduct like this, it will have an effect of regulating the entire patent field, it can distort the national patent policy. So, LOT does what Congress and Courts failed (exactly like what it says). Abundance of lessons can be found how business-and-government “partnership” brought down power. Also, Russian patent system is the best model for study. It creates only two kinds of art: military technologies and food recipes. A unique patent policy creates a like technological landscape. Anyone can see what LOT will bring to the nation.

    Private regulation like this can slowly preclude cross-field inventions, disruptive inventions, and force most of the U.S. population to get out of invention venture. Inventions by ordinary citizens is the very thing that the U.S. Constitution intended to protect. Soon, all you can see is product improvements, business methods, social media, big-centralized business portals of all kinds, inefficient production methods, etc.

    I hope more people will study how such a private regulation will impair national technologies, economy, and national security.

  3. Benny August 28, 2018 5:31 am

    J Wu
    “Private regulation like this can slowly preclude cross-field inventions”.
    On the contrary, by squeezing out PAEs, you create a greater incentive to sell patent rights to operating companies. The new (operating) patent owner is far more likely to use the acquired patent for cross-license purpose rather than simply negotiating a one-time cash settlement, thus increasing the possibility of practical innovation without the hurdles of FTO or clunky design-arounds.

  4. Anon August 28, 2018 8:23 am

    Benny,

    There is zero support for your stated proposition.

  5. Jianqing Wu August 28, 2018 9:27 am

    Denny,

    “The new (operating) patent owner is far more likely to use the ACQUIRED patent for cross-license purpose rather than simply negotiating a one-time cash settlement.”

    Your single statement does not negate my argument. First, you implied operating companies will ACQUIRE patents from least some non-corporate patent owners. This was true a long time ago. Operating companies initiated a first contact with inventors to acquire their patents. This is no longer true. The truth is they avoid contacts (they have right reasons), imitate patented technologies, hide them in products and marketing materials. What operating companies do is natural and proper response to the patent law.

    Second, “cross-field inventions” I am talking is much and much broader than the fields you have inferred from the crossing licensing activities of operating companies. Businesses are always revolved around a narrow ranges of things they believe can help them make money. You may think that computers, information technologies, and social media must be the most important things that humans need.

    The world does not have to be the one we see now. I still remember that before the information age came, people once talked about a biological age. Imagine we now lived in another world where people could manage pain easily, cure any disease at will, achieve much longer lifespans with little stress and more happiness. People did not need cell phones as much as we need now, due to complete different social structures, lifestyles, culture and technologies. There are potentially much healthier and happy way of life for the mankind.

    I heard a while ago that DC metro staff spread chemicals in trains to prevent epidemic outbreaks (the same practice that people might have done decades ago). There are a huge domains of unknown technologies, unknown cultures, and new ways of life. Why should our patent system preclude all possibilities. What we are living and experiencing now is what the mankind happens to get by strike of luck. If the fiber optic cable were not invented, we might use something completely different.

  6. Benny August 28, 2018 9:47 am

    Anon,
    “There is ” does not equate to “I have”.
    J Wu.
    Patents are not for teaching the useful arts. They are for gaining a step up on the competition. Our company would gladly pay happy money for a patent from an independent inventor covering a product that our competitor is developing, and we would use it as leverage to cross license patents they hold which prevent us from bringing our product to market. One of our competitors has pulled that one on us, going to the extent of re-issuing the patent so they could wrap the claim around our knurled flange bracket design. When I say “product” I’m not referring to complicated communication algorithms or cutting edge bio-tech, I’m referring to the boxes you buy at Target or Best-Buy for your kitchen or garden. If you want an example, choose a product from your home, find 2 major manufacturers of that product (usually from South Korea) and look at some of their recent patents covering that product – they will patent the knurled flange brackets and every nut and washer holding them in place.

  7. Anon August 28, 2018 10:47 am

    “There is ” does not equate to “I have”.

    Your response is a non-sequitur. There is NO support for your statement.

    Whether or not “you have” is simply not the point I was presenting.

Post a Comment

Respectfully add to the discussion.

Name *
Email *
Website

Our website uses cookies to provide you with a better experience. Read our privacy policy for more information.Accept and Close