Wednesday, May 21, 2014
Alan Devlin (Latham) has a new paper on Antitrust Limits on Targeted Patent Aggregation.
ABSTRACT: Patent-assertion entities, or “PAEs,” are non-technology-practicing companies that aggregate and license patents under threat of suit. Their activities have drawn fire, including Presidential condemnation, and spurred proposed legislation to protect operating firms against them. PAEs leverage flaws in the patent system to extort firms that independently invent and sell technological goods to consumers. Since PAEs tax innovation, and appear not to act not as a conduit for wealth transfer to original patentees but as bottlenecks, their worst rent-seeking practices almost certainly reduce net incentives to innovate, and harm consumers. This is all the more true if, as seems likely, the principal desirable incentive that PAEs create is to file patents rather than to commercialize technology.
The idiosyncratic nature of today’s patent system facilitates PAE activity. Patents’ numerosity, vague scope, widespread invalidity, and sometimes-functional claiming prevent even the most assiduous technology companies’ securing guaranteed clearing positions before building products. These conditions guarantee that, ex post, a universe of potentially infringed patents of dubious validity exists in many industries, especially in information technology. Fortunately, atomized ownership of this intellectual property limits enforcement ex post because the unlikelihood of success in asserting few patents, combined with the risk of countersuit and high litigation costs, make suing a losing value proposition. The result is a public-goods benefit in constrained enforcement that ameliorates hold-up potential. Even ex post, owners of disaggregated patents typically lack market power unless those IPRs are likely valid and infringed.
PAE accumulation changes all of that. By amassing hundreds or even thousands of patents, never building or selling goods, using shell companies to conceal the contents of their portfolios, and asserting patents in waves ex post, PAEs can realize immense hold-up power. Crucially, this conclusion holds true even if the great majority of their patents are invalid or not infringed. This dynamic leaves many operating victims vulnerable to threats of incessant litigation, thus forcing them to part with tens or even hundreds of millions of dollars for licenses that they never needed to engineer successful products. Commentators increasingly — though do not universally — accept that PAEs harm the economy. The solution, though, is less clear. Many propose reforming the patent system, such as requiring losing patentees to pay the other side’s costs and forcing PAEs to disclose their portfolios. Some legislative reforms do appear likely, and the Supreme Court in 2014 will consider whether to invalidate certain computer-implemented inventions. Nevertheless, modest changes are unlikely to remedy PAE hold-up in all its forms.
Lacking other solutions, some policymakers now look to the antitrust laws. To be sure, not everyone believes that competition rules proscribe PAE conduct, or otherwise suitably constrain patent hold-up. Indeed, antitrust rules are not a cure-all. This Article argues, however, that antitrust law can viably limit PAEs’ abuse of the patent system. Section 2 of the Sherman Act proscribes willful monopolization, Section 7 of the Clayton Act prohibits asset acquisitions that tend substantially to eliminate competition or to create monopoly, and the patent-misuse doctrine neutralizes an asserted patent the owner of which has improperly broadened in scope with anticompetitive effect. These provisions have sufficient teeth to catch the most egregious forms of hold-up founded on ex post patent aggregation and assertion. This paper explains how PAE activity can reduce social welfare, and how PAEs’ targeted patent acquisitions and assertion against profitable goods can violate competition rules.