What is lacking from the debate over “patent trolls” is the “other side” of the story. In other words- who is benefiting from large multinational high tech companies being forced to deal with claims of infringement against them?
The major beneficiaries are not the patent trolls- but the thousands of single patent owners and small high tech start ups who for the first time ever-are able to monetize the enormous investments in time, money and ingenuity that they have made in their inventions.
The fact is- today, small patent owner and small tech start ups have real options to liquidate their intellectual property assets that they didn’t have before Intellectual Ventures and Acacia Research Group entered the market in the mid-2000s. If patent trolls sue big companies- then the owners of these patents were able to liquidate their investments. When the multinationals have to worry about these entities suing them it is good for the owners of the patents.
Patent trolls are not bad for them. That’s for sure.
The Federal Trade Commission has extended the deadline for public comments on its proposed study of patent assertion entities (PAEs), which it announced on September 27. To provide additional time for interested parties to submit comments on the proposed study, the deadline has been extended throughDecember 16, 2013. The Commission will not consider requests for further extension. Comments can be submitted electronically.
PAEs are firms with a business model based primarily on buying patents and then attempting to generate revenue by asserting the intellectual property against persons who are already practicing the patented technologies. The FTC is conducting the study in order to further one of the agency’s key missions — to examine cutting-edge competition and consumer protection topics that may have a significant effect on the U.S. economy.
In their article entitled The Private and Social Costs of Patent Trolls, James Bessen, Jennifer Ford, and Michael Meurer present a study on patent litigation involving Non Practicing Entities (NPEs), which they define as firms that do not produce goods but rather acquire patents in order to license them to others. Bessen et al.’s conclusions are startling. The loss to defendants involved in NPE patent suits during the last four years “exceeds $83 billion per year, over a quarter of U.S. industrial R&D spending per annum;” and NPE patent litigation constitutes a “very large disincentive to innovation.” Bessen et al.’s article was prominently featured on the cover of the Winter 2011-2012 issue of Regulation magazine with a cover illustration of oversized humanoids with visible malign intent, armed with clubs, holding up innocent travelers for payment at a bridge, wherein the cover is titled “Patent Trolls – How NPEs harm innovation.”
In my full article “Questionable science will misguide patent policy,” I expose fundamental flaws in the methods that Bessen et al. apply in their studies and explain why their fantastic cost estimates should be dismissed as extremely biased and unreliable, and why their conclusions should be discarded as misleading for patent policy. An abridged version follows.
Bessen et al.’s stock return event studies on patent litigation
Bessen et al.’s thesis is predicated on “event studies” of lawsuit filings—what happens to an alleged infringer’s stock price around the filing of a patent infringement lawsuit, after taking into account general market trends and random fluctuations of the individual stock. Without providing any proof, these authors argue that during these “events,” stock value declines that are otherwise unaccounted for by estimated market trends (called “Abnormal Return”), reflect “the costs of lost business, management distraction and diversion of productive resources that might result from the lawsuit, possible payments needed to settle the suit, and the reduction in expectations of profits from future opportunities that are forestalled or foreclosed because of the suit.”
Enter Professor Robin Feldman, who has become the preeminent researcher on issues of patent litigation, particularly as it refers to so-called patent monetizers. Professor Feldman has found striking new data on patent trolling and the effects of the America Invents Act, which to me suggests that the AIA has clearly been successful in its intended goal of reducing the number of defendants in a single patent infringement litigation.
Professor Feldman’s new analysis was developed by breaking down the massive data set she collected into a month-by-month analysis of patent infringement lawsuits. The data examines all patent lawsuits over four key years, which represents approximately 15,000 patent infringement lawsuits and 30,000 patents asserted. Not surprisingly to those of us who have closely followed the America Invents Act, but there was an enormous spike in litigation leading up to the implementation of the AIA in September 2011. The following graph tells the story.
Washington, D.C. (October 10, 2013) – The App Developers Alliance is joining with law schools nationwide to help startups battle patent trolls. The Law School Patent Troll Defense Network is a consortium of law school clinics that will provide free legal representation to small app developers and other entrepreneurs that have been threatened or sued by patent trolls. Clinics participating in the Network may also represent the Alliance in major patent cases affecting developers and the app community.
“Too many smash-and-grab patent trolls think startups and small companies are easy roadkill on their path to amassing a portfolio of settlement payments, revenue-share agreements, and equity stakes,” said Alliance President Jon Potter. “By providing free legal services to entrepreneurs that cannot afford quality representation, the Troll Defense Network will help innovators fight back and continue to build great products and create jobs.”
Due to economic constraints and fear, small companies often ignore patent assertion letters or negotiate directly with trolls, without the benefit of legal counsel. Some app publishers have dramatically changed their business and have quashed innovative product features in response to trolls’ assertion letters – though legal counsel may have advised them to stand strong and fight back.
I recently received an e-mail from a colleague who is embarking on an interesting research project. This colleague, who would like to remain publicly anonymous for the time being so as to be able to conduct the underlying research privately and without influence. The researcher is seeking to interview a number of different industry participants for a research study on patent assertion entities.
Specifically, the researcher is looking to talk to the following types of people:
Solo inventors or small firms that have sold their invention rights to a patent assertion entity.
Solo inventors or small firms that attempted to sell their invention rights to a manufacturing entity but failed.
Entities that previously were engaged in manufacturing but now primarily license their intellectual property portfolios.
Entities that have licensed technology from a patent assertion entity that previously was a manufacturing entity.
I have absolutely no problem with enforcing patent rights, and frankly I don’t think it should matter how the patents were acquired, but there is something exceptionally seedy about the use of shell companies and taking a back-end on revenues like Intellectual Ventures is routinely accused of doing. But if there is infringement of solid patents then there should be recourse. Having said that, it would be naive to pretend that there is not real evil lurking in the patent infringement realm. Stories of $500 to $1,000 offers to settle and avoid patent infringement litigation that would cost millions of dollars to defend abound. Some courts have openly acknowledged what feels like “extortion-like” activity. See Indicia of Extortion and Troll Turning Point?
That there are bad actors is hardly surprising, particularly given the lucrative nature of the business model and the fact that many district courts feel as if they do not have the tools to do anything other than allow their courtrooms to be used as the main prop in the extortion-like shakedown. Of course, despite what some district court judge say, there are considerable powers that can be exercised if judges really do want to stop the bad behavior. See Judges Can Make Patent Trolls Pay. But the shell game played with the ownership of patents does add a layer of complexity to figuring out what is really going on and who is calling the shots. Why is it so necessary to have such secrecy? As Justice Brandeis once said “sunlight is the best disinfectant.” The troll industry could use some disinfecting. It is a sin that these nefarious actors tar those innovators with real, strong patents that are infringed.
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