Patent Trolls or Patent Heroes? – The Increasing Pressure on Patent Assertion Entities

Patent Trolls or Patent Heroes? – The Increasing Pressure on Patent Assertion Entities

On July 13, 2013, the New York Times published an article on Erich Spangenberg's business enterprise, IPNav, which is considered to be one of the largest Patent Assertion Entities (“P.A.E.s”) in the world. Analyzing the business model of P.A.E.s is important to understanding the legal limits of these entities.

The modus operandi of a P.A.E., such as IPNav, is not complex: it is a company that acquires (usually temporary) rights on a batch of patents from different rights holders.  After identifying companies that are allegedly using these patents without authorization from the patent holder, the P.A.E. will attempt to monetize its patents by charging licensing fees or threatening (and sometimes engaging in) costly lawsuits.

These practices have been questioned by the media and society because P.A.E.s themselves do not commit any investment in the innovative process and the legal arguments used to support the rights claimed by the P.A.E.s are, in many cases, weak. In some instances, even if a patent has not actually been infringed upon, a company that receives notice by a P.A.E. may consider it worthwhile to pay licensing fees in order to avoid the threat of further costs and time spent in a possible lawsuit. It is not a coincidence that the main targets of P.A.E.s are large corporations such as Amazon, Oracle, and Citigroup - businesses of higher net worth that may be willing to pay more in response to such claims. For these reasons, P.A.E.s are often referred to as “patent trolls.” A study by researchers at Boston University School of Law reveals that the activities of patent trolls in 2011 cost approximately US$ 29 billion for “trolled” companies.

Due to these business practices, P.A.E.s are often cited as the enemy of innovation.  The President of the United States, Barack Obama, declared in February 2013 that patent trolls exist to extort money and do not contribute to innovation, and that legal reform is needed to prevent the misuse of the patent system. In June 2013, the White House announced major steps to improve incentives for future innovation in high tech patents by restricting the activities of P.A.E.s. These steps include executive measures, such as tightening functional claiming and strengthening the enforcement process of exclusion orders, and legislative recommendations, such as requiring patentees and applicants to disclose the real party-in-interest, permitting more discretion in awarding fees to prevailing parties in patent cases, and protecting off-the-shelf use by consumers and businesses.

P.A.E.s, however, claim to represent positive forces for innovation. P.A.E. owners often argue that their activities are very important to small inventors and small innovative companies, who may not have the organizational and financial structures necessary to enforce their exclusive patent rights. Through the support of P.A.E.s, small inventors can obtain appropriate compensation when their patents are infringed by third parties, encouraging them to invest more time and money in new innovations. Furthermore, Erich Spangenberg emphasizes that entities like IPNav can also help large innovative companies monetize their patents, encouraging future investments by these companies in new technologies.

It is important to note that not all lawsuits filed by P.A.E.s are abusive or lack reasoned legal grounds. The P.A.E., IPCom, was successful in lawsuits against the German company Deutsche Telekom and indirectly contributed to compensating inventors of the infringed technologies. From this perspective, P.A.E.s acting in accordance with ethical and legal standards actually incentivize innovation by small inventors and large companies alike.

In this blog, favorable and adverse opinions about the activities of P.A.E.s have been reported, reflecting the contrasting positions held by the media and legal critics. This is also indicative of the fact that this topic will be open for continued discussion and debate. Currently, there are no specific legal provisions concerning these entities at the international level, causing considerable legal uncertainty.

In my opinion, considering all P.A.E.s as enemies of innovation and banning them indiscriminately is not compatible with current commercial practices, nor is it a way to promote innovation.  It is a common occurrence that the direct economic beneficiary of an intellectual property right is not necessarily the inventor or creator per se, but a third party who has acquired these rights (e.g. copyright enforced by music publishers, patent rights enforced by large technology companies). The practice of assignment and transfer of patent rights is expressly allowed under Art. 28 Sec. 2 of TRIPS. In principle, therefore, the activities of P.A.E.s are not necessarily illegal or disadvantageous to society.

In fact, P.A.E.s only become a problem for development and innovation when they misuse patent rights, abuse procedural requirements, or threaten companies into settlements based on non-existent infringement. In such cases, bad faith actions of patent trolls have to be identified and punished by the courts on a case-by-case basis. General and indiscriminate prohibition of P.A.E.s would achieve these goals but at the same time eliminate the benefits that these entities provide. Indeed, it may be that other areas of law and current policies need to be changed in order to eliminate the misuse of patent rights. The importance of high-quality patents for avoiding patent trolls has been expressly recognized by the European Commission - granting patents for imprecise and ambiguous claims lead to misleading interpretations on the scope of a patent and facilitate abusive practices.

Any current abuse of rights by patent trolls also reveals the major flaws in patent litigation procedures. Due to the high cost of litigation, extensive length of proceedings, legal uncertainty in the area of patents, and the risks of granting preliminary injunctions, companies are more apt to settle when faced with a claim from a patent troll  - even if the claims lack a strong foundation.  Reforming procedural law as it relates to patent litigation should also be reconsidered by legislators in order to avoid potential abuse in the future.

In conclusion, the activities of P.A.E.s, when performed under ethical standards, are valid from a legal perspective and can actually support the innovative activities of both small and large companies. Instead of outright prohibiting P.A.E.s, the most reasonable solution would be to identify and evaluate abusive lawsuits filed by P.A.E.s on a case-by-case basis. Furthermore, requiring Patent Offices to engage in a more thorough analysis of patent claims before granting intellectual property rights and effectively reforming procedural laws may help to prevent the proliferation of abusive patent trolls.

Pedro Henrique Dias Batista is an IPilogue Editor and a PhD student at Ludwig Maximilian University of Munich.