Keeping an eye on patent trolls

By Ralf Boscheck
May 10, 2016

The question worth pondering: Are patent trolls innovation provokers or idea thieves?

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innovation-eye-400In the past five years Cisco and J.C. Penney have spent close to $350 million fending off demands from patent trolls, which are more politely known as ‘patent assertion entities,’ or PAEs. In February, a court in Texas ordered Apple to pay $532 million to a PAE. These are just two of the more high-profile reasons why both the US and the European Union have recognized that the laws and regulations around intellectual property are in profound need of an overhaul.

The question that remains is whether or not the necessary guidance would be most efficiently provided through competition law.

Exactly what approach is needed still needs careful consideration. Any guidance will need to take into account patent trends, actors, rights and obligations, and the nature of current regulatory concerns – and it will need to do so despite the scant empirical analyses and modeling that has been done on patent trolls.

 

The patent ecosystem

The US is a dominant force in this area, both by number of patents granted and the value of litigation associated with their assertion. By 2013 more than a quarter of the 9.45 million patents in force had been issued by the US Patent and Trademark Office. In that same year, two thirds of all US patent lawsuits were brought by PAEs – doubling their share compared to 2010.

This recent growth in global patenting activity, and the emergence of specialized assertion entities, has been accompanied by a shift in the strategic and commercial use of intellectual property assets, and increasing concerns about its impact on competition, innovation, and economic welfare.

PAEs’ activities vary significantly yet they are, by and large, usually met with general suspicion and outright hostility. At one point, the White House’s position was that “on balance, PAEs have had a negative impact on innovation and growth”. Yet after more recent evaluations of the same data on which that conclusion was based, the White House itself, seems to have backed up and are not endorsing this view. There are other analyses which suggest that PAEs can promote rather than obstruct innovation.

 

What can regulators do about this?

Regulators face a twofold challenge: First, they need to balance the legitimate interests of patent holders and licensees in order to determine which activities and contracts the law will enforce, or otherwise recognize as creating legal rights. Second, they need to establish rules that minimize both the costs of assessing a given case, and the costs of taking wrong decisions.

One traditional approach has been to use antitrust law. However, the ultimate position is that PAE assertion efforts are not, generally, easily caught by US competition rules that require harm to competition and competitive process in order to assign antitrust liability. This is not to suggest that they are pro-competitive, either; it simply means that attacks on this front are unlikely to be successful. New reforms in the US have begun to take account of this by targeting drivers of the PAEs’ business model, for instance by preventing them from suing disparate entities in a single lawsuit.

In Europe, the EU’s position on PAEs has most recently been outlined by Alexander Italianer, the European Commission’s Director General for Competition. The EU expects PAEs to be less active in Europe because damages tend to be lower. PAEs are treated as any other company, including having the same right to defend their intellectual property and the need to honor fair, reasonable, and non-discriminatory (FRAND) commitments whenever standard essential licenses are sold.

It is generally considered legitimate to seek an injunction if a patent is infringed, although it can be considered abusive if the patent holder has given a commitment to license on FRAND terms, and the licensee has been willing to enter into a license under these terms.

What is missing, here, however, is that neither the Commission nor current case law helps to define what FRAND actually means. Instead, national courts are being called upon to determine whether or not an injunction is appropriate – an approach known as regulatory delegation.

For instance, Germany’s Court of Justice recently came back with a four-step negotiation process to sustain licensing in a FRAND manner. This is very much in line with the evolution of EU competition law, but has since been criticized because, in the absences of any benchmark to assess the “FRANDness” of licensing terms, a patent holder may follow the process and still be exposed to antitrust liability if his position is subsequently decided not to be FRAND.

Both US and EU regulators are struggling with the dilemma of devising standards that fit a variety of circumstances, yet can be easily applied. There is a need for more clear-cut regulatory direction on both sides of the Atlantic. As yet, however, it is not clear how that will be achieved.

 

This is an edited extract from Patent Trolls: In Search of Efficient Regulatory Standards, a research paper from Professor Boscheck.

The Author

Ralf Boscheck

Ralf Boscheck is the Lundin Family Professor of Economics and Business Policy at IMD. He is program director of IMD's MBA program. For more information, or to contact Professor Boscheck, please visit his faculty profile page.

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 as of the time of publication and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 5 Comments comments.

  1. Anon2 May 10, 2016 8:04 am

    “The question worth pondering: Are patent trolls innovation provokers or idea thieves?”

    In some countries, the citizen is truly part of a state, he has a duty to act as one of its cells for its benefit and the benefit of a so called “public”. Such states are rife with regulation and accordingly wanting of individual freedoms and rigths.

    In the US, principles which originated from the enlightenment included the idea that individuals have rights and that government should protect them. Some of the rights of individuals include property rights, some of which are intellectual property rights, and the right to assign and transfer them for value, and the right to enforce those rights.

    When society has come to the point that it sees the complex process of, the valid and honorable granting of patent rights to someone for an invention, the upholding of contract law enshrining the meeting of minds as between rational men in a free market which sees through their intention to transfer or license those rights in exchange for value, and the subsequent enforcement of those valid rights properly and rightfully transferred in the hands of another someone, as THEFT, then the moral and intellectual legacy of the enlightenment, and the founding fathers is truly lost,

    When those who ask for more regulation and fewer freedoms, a little here or there where they think it best, get Statism in its full oppressive tyranny, I hope they remember, they Got what they asked for.

  2. Ned Heller May 10, 2016 3:59 pm

    I truly am becoming confused over what the alleged problem is with trolls. Are they problem because they are asserting invalid patents? Are they a problem because they are pricing licenses below the cost of litigation. Are they a problem because they sue the small fry who cannot afford to litigate?

    Each of these is a somewhat separate problem, but an invalid patent generally reads on what people are already doing so that is a bigger problem than abusive litigation practices. These can be dealt can be dealt with by the courts, particularly since Octane Fitness.

    What Congress seems to have done in the AIA is assume the troll problem primarily relates to invalid patents. Their instant solution was to move patent validity litigation into the PTO, lower the standard of proof so that reasonable doubts no longer favor the patentee, and allowed the PTO to use BRI that resolves reasonable claim construction disputes in favor of invalidity.

    But this procedure applies to all patents, not to patent wielded by trolls. Patents that claim valuable inventions are now being invalidated due to the lower standard and BRI. The invalidity rate in court based on 102/103 is 33%. In the PTO, it is closer to 86%, more than double. Everyone knows this, which is why stock prices drop when IPRs are filed. Everyone knows that in the hands of the PTAB, the patent is doomed given the lowered standards, etc.

    So the question is not what to do about trolls. The AIA already dealt with them quite adequately, and then threw the baby out with the bathwater.

    Because of overreaction to trolls, arguably the patent system itself is now in peril.

  3. Ternary May 11, 2016 11:27 am

    “In February, a court in Texas ordered Apple to pay $532 million to a PAE. These are just two of the more high-profile reasons why both the US and the European Union have recognized that the laws and regulations around intellectual property are in profound need of an overhaul.”

    The Apple case is the VirnetX case. The validity of the VirnexT patents was upheld several times in court and infringement by Apple was proven in court. Why does the VirnexT case demonstrate a “profound need of an overhaul?” What if the patent was asserted by the original inventor? (Does the author know who that is?) Or what if the patent was owned by say Samsung or SAIC and asserted? Does the author suggest setting different standards for different patent owners without wanting to say it explicitly?

    The VirnetX case actually demonstrates that the patent system works. A patent is a property right. The property right is owned by VirnetX. The property right was asserted on the basis of infringement by Apple as proven in court. The validity of the patent was challenged several times and upheld in court.

    Apple applies a hard-nosed approach towards outside IP, as it is entitled to. This appears to be based on an attitude of efficient infringement. Again, companies are entitled to such an approach. However, in several cases this approach backfires in a spectacular way, when infringement is proven. I see no reason for introducing the concept of trolls into this case even when served with an academic sauce. The innuendo that VirnetX are “idea thieves” is yet another low in this discussion.

  4. step back May 11, 2016 12:19 pm

    Thanks to the equal protection clause of our USA Constitution all inventors are equal except that some are more equal than others.

    If you are an inventor employed by a too big to infringe corporation then the fact that you the inventor rarely practice the invention personally yourself is of no moment because the corporate personhood subsumes your individual identity and ergo you are never labeled a NPE troll.

    On the other hand, should you have the misfortune of being a freeman in this society of indentured servants of the corpocracy and you dare to assert rights promised and granted to you by the government, then you are an evil despicable creature who lives under a bridge and abuses baby goats.

    http://patentu.blogspot.com/2016/05/moonshooting-ourselves-in-foot.html

  5. John Willkie May 12, 2016 1:40 am

    “Trolls” are a “problem” because infringers with PR budgets have painted patent owners that way. Not unlike the non-existent “net neutrality” problem that Google and others wanted to be “solved” until they saw the results, when they became silent.