Monday, April 8, 2013
Posted by Colleen V. Chien*
“Holding Out or Holding Up?”
To some, patent assertion entities (PAEs) satisfy the unmet needs of innovators to realize the value of their patents. Enforcing patents is risky and costly, and the refusal of big companies to give patentees their due makes it impossible to realize the core promise of patents – the right to exclude. Only when the demand comes from a PAE does it get any attention from infringing corporations, who themselves are increasingly supporting PAE activity.
PAEs are a solution to the problem of patent hold-out.
To others, PAEs hold the assets of failed businesses that got lucky with a broad patent. They clog the courts to extort value from companies that actually make things, serve customers, and create jobs. They spend and risk nothing while taxing and sometimes even endangering the survival of small companies –55% of unique defendants make $10M or less in revenue – of whom they demand nuisance value settlements – or else.
PAEs are in the business of patent hold-up.
Which account is right? And what should, what can we do about it? These important questions are exceedingly hard to answer because like their fairy-tale counterparts, patent “trolls” hide – not behind bridges, but behind unusual corporate structures and non-disclosure agreements. Yet it is only with a good understanding of the various PAE models that we can know how they function, and what interventions will best preserve the benefits and curb the abuses.
That’s why I join others in welcoming examination of the PAE business model by antitrust authorities. But I may depart from them by advocating a different type of inquiry. In addition to focusing on antitrust concerns, I think the FTC should position itself as the eyes and ears of others directly affected by PAEs:
Companies, that are footing the estimated $29B yearly bill associated with NPE suits, who want to know who is behind these suits, and how to avoid paying money for invalid patents;
Courts, 62% of whose patent docket is now comprised of PAE suits who want to fairly and efficiently resolve disputes while discouraging frivolous litigation;
Patent agencies across the system, who want to know whether or not the interventions they are contemplating would work and leave the rest of the system intact.
Companies, courts, and the patent agencies are repeat players in the thick of the patent ecosystem. They have the most to lose if the harms and benefits of PAEs are not appropriately balanced, and therefore the most incentive to use the levers at their disposal to get it right. But they need guidance on how to do so. The FTC can provide this guidance, if it keeps in mind a few basic principles.
Don’t Miss the Forest for the Trees
Much of the recent activity around PAEs has centered on litigation abuses. But most disputes are resolved before a lawsuit is filed. And small companies are more likely to get spooked by a letter. We can count lawsuits, but, because the lack of a demand letter registry, we don’t really know the scope and of the extent of PAE activity that occurs in the shadow of litigation. The glimpses we have of that shadow – for example the 13,000 letters Innovatio sent as compared to the 26 cases it has brought – suggest that it is large. Some small companies will go to great lengths to avoid ruinous litigation. Companies like Intellectual Ventures have brought very few suits. Because of NDAs, it’s also hard to know how suits that are filed actually resolve. The ability to get data on activities that are below the radar is a unique comparative advantage of the FTC’s investigative authority. It should be exploited.
Money Chases Spread
Despite the moral overtones of PAE critics, at the end of the day, the PAE business is just that: a business. Thus, to understand where the PAE phenomenon has been and is going, and whether interventions like fee-shifting will work, we need to understand the business model and profits that are associated with different PAE activities. What are the economics of campaigns against end-users vs. those against manufacturers? How do the margins compare when the patent is “privateered” or vs. sourced from a defunct or non-practicing company source, or when the patents are asserted but not litigated vs. those that are litigated, or when different types of defendants are targeted.
Perhaps more importantly, how do these economics change when certain interventions are applied? For example, in international jurisdictions where fee-shifting is the norm or where it is harder to get software patents? Or when a case is filed in a particular venue, vs. another or, at the case- or patent- level, when cases are transferred, or stayed, or patents are the subject of post-grant challenges, or invalidated? From a societal perspective, are greater returns going to better patents?
Some of this information may encompass trade secrets that the FTC cannot disclose publicly. However, understanding how PAEs make money and how profitably they are doing so are a key to influencing them.
Follow the Money
One reason PAE targets are asking the government for help is that the use of conventional self-help tools has been stymied by the difficulty of figuring out who is really behind a campaign. The FTC should ask PAEs: who stands to benefit from your successful assertions of particular patents? One possible way to get at this is to ask: when a damages award is given to a PAE, where does the money go? In addition, how are the costs of revenues accounted for, in terms of outlays to the inventor, investors, lawyers, and others? How much did you pay for the patent, if you bought it outright, and how was the deal structured? How do you select targets to go after? Another important bit of information pertains to what a PAE's patent and other assets are, as well as the assets (patent or otherwise) of parties that benefit from successful assertions.
Comparing the information that a FTC 6(B) investigation yields versus the information publicly available can inform the process of drafting rules supportive of meaningful, not burdensome disclosure (real-party-in-interest) requirements. Within these disclosures, pathways to correcting the asymmetries that PAEs exploit may reveal themselves.
One final point. If the FTC does conduct an investigation, it should direct its attention towards not only the large and notorious PAEs but the small and anonymous ones. Campaigns based on a small number of patents can have a big impact. By prioritizing its inquiries based on consumer and competitive impact – both observed and suspected – the FTC can make sure its activities also have this same, outsized impact.
*Professor Chien teaches at Santa Clara University Law School and spoke at the FTC/DOJ conference in December. (slides) She has published several studies of PAEs including with respect to the patent marketplace (in which the “PAE” term was first used), patent litigation, the ITC, and startups. She has also written on historical episodes of trolling and efforts to regulate them.