Wait. It seems their feelings get hurt if you call them trolls. IPNav tells the FTC it's "pejorative". Barnes & Noble in its comments uses the word troll throughout, and Newegg in its comments [PDF] said the word is a perfect fit, absolutely descriptive of how they act (see next article). The FTC calls them PAEs. I'll stick with Barnes & Noble and Newegg on this one, if you don't mind.

We'll be reading the comments from IPNav [PDF], which claims to be a "white hat" troll, as well as a snip from MOSAID [PDF], which also claims to be one of the good guys. They feel they are misunderstood. It is in a deal with Nokia and Microsoft to go after people with their sorta donated patents, so you might wonder what Microsoft has to say. In a nutshell, it says [PDF] it wouldn't want the PAE business model shut down. *That's* not the problem. Noooo.

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4 The New Business Model

These findings should be interpreted cautiously. While there are large losses from NPE litigation, not all NPEs today are opportunistic litigators. Nor does this imply that NPEs have not played a more positive role in the past. It is important to understand what is uniquely different about the NPEs who are behind today’s litigation surge.

Indeed, today’s NPEs tell us they are different. Proponents tell us they are a new breed of company, a new business model, that is misunderstood (McDonough 2006, Myhrvold 2010). They tell us that NPEs are, in fact, good for society because they are creating “a capital market for invention” by buying patents and selling licenses. This helps “turbocharge technological progress” “by realigning market participant incentives, making patents more liquid, and clearing the patent market.”

What, exactly, is new about this business model and what does it mean for innovation? Markets for technology have been around at least since the nineteenth century and studies have documented some of the benefits of these markets (for example, Arora et al. 2004): they allow inventors a way of getting money for their inventions, thus providing them with stronger incentives to invent, and they help spread new technologies to the companies who can commercialize them the best. But most of this literature concerns markets for technology, not markets for patents. The transactions occurring around NPE litigation do not involve the transfer of technology—the defendants are already using the technology. Instead, these transactions involve just the transfer of patent rights (and money).

Even so, some advocates hold that NPEs are socially beneficial because they reduce the costs of patent transactions (McDonough 2006). To the extent that NPEs facilitate the clearance of patent rights before firms invest in technology this is a clear benefit. The patent brokers and auctions facilitate transactions, but that is not obviously true for those NPEs who are primarily involved in asserting and litigating patents. Moreover, to the extent that these NPE transactions occur only after firms invest in technology, any savings in transaction costs has to be offset by the associated dispute costs. We have shown that the litigation losses amount to over half a trillion dollars, so these dispute costs are substantial. No reasonable estimate of the transaction costs of licensing these patents could approach the magnitude of these litigation losses.

Some proponents of NPEs argue that the threat of patent litigation has been exaggerated. Myhrvold (2006) asserts “there is no ‘crisis’ or ‘explosion’ in patent litigation” generally and that NPE litigation is not very significant. Indeed, one study covering the years 2000 – 2002 found that NPE litigation accounted for only five percent of total patent litigation. But litigation rates have risen dramatically since the mid-1990s and NPE litigation rates have grown even faster. More recent studies find that NPE litigation accounts for 16-17% of all patent lawsuits (Chien 2009; see also Patent Freedom 2011).

Although this percentage is not very large (it corresponds to several hundred lawsuits per year), it is a mistake to conclude that NPE litigation is not important. First, because NPE lawsuits involve multiple defendants, their impact is much larger and because of this, the estimates of lost wealth are large. Second, as noted above, NPE lawsuits are concentrated in one technology area, namely, software and software-related patents including business methods. Consequently, this litigation has a disproportionately large effect on firms working with these technologies. A thumbnail calculation suggests that NPEs account for about 41% of patent litigation involving software patents.²⁰ So NPE litigation is quite significant for this technology.

Thus the new business model for NPEs is not about licensing patents in general; it is mainly about licensing software patents, including patents on business and financial processes. This is significant because we have argued elsewhere that software patent litigation has risen dramatically because of eroding patent notice and that software patents have been an important contributor to this trend (Bessen and Meurer 2008). That is, software patents have “fuzzy boundaries”: they have unpredictable claim interpretation and unclear scope, lax enablement and obviousness standards make the validity of many of these patents questionable, and the huge number of software patents granted makes thorough search to clear rights infeasible, especially when the patent applicants hide claims for many years by filing continuations. This gives rise to many situations where technology firms inadvertently infringe. And this means that there is a business opportunity based on acquiring patents that can be arguably read to cover existing technologies and asserting those patents, litigating if necessary in order to obtain a licensing agreement. Models by Reitzig et al. (2007) and Turner (2011) show that the patent troll business model only makes economic sense when there is such inadvertent infringement. And the rise in NPE litigation has closely mirrored the rise in software patent litigation (Bessen 2011). Moreover, fuzzy boundaries can explain why so many NPE lawsuits have multiple defendants: many firms may have reasonably concluded that they did not infringe or the patents were invalid or they may have been unable to find these patents while conducting a clearance search. Later, they encounter an NPE who sues over an aggressively broad interpretation of the patent’s scope and validity.

Thus the rise of this new business model can be explained by the rise of “fuzzy boundaries” for software and other patents. Large numbers of hidden patents or patents with unpredictable boundaries provide an opportunity to extract rents from technology firms. But this is a very different business from the business pursued by those patent brokers, consultants and auctioneers who facilitate markets for technology.

5 Conclusion

Firms that buy and license technologies can improve the market for technology and thus improve the innovation incentives for independent inventors. Patent agents and markets for technology have been an important part of the US innovation system since the nineteenth century.

But the role of the current NPEs who assert and litigate patents is something altogether different: it is focused on software and related technologies, it targets firms that have already developed technology, and it is very much about litigation, especially litigation in the special circumstances where multiple large parties can be sued at once. Whatever the general benefits of technology markets, this does not obscure the fact that this particular manifestation involves large amounts of costly litigation. It is hard to believe that markets can be somehow improved by having thousands of lawsuits that incur hundreds of billions of dollars in losses.

We have shown that defendants have lost over half a trillion dollars in wealth—over $83 billion per year during recent years—and this has not improved incentives to innovate. While the lawsuits might increase incentives to acquire vague, over-reaching patents, they do not increase incentives for real innovation. The defendants in these lawsuits are firms that already invest a lot in innovation. Their losses make it more expensive for them to continue to do so and it also makes them less willing to license new technologies from small inventors. Meanwhile, independent inventors benefit very little from what the large companies lose.

Microsoft addresses that. Here's a snip from Microsoft's comments:

In our view, the limited evidence available suggests that the growth of PAE activity is merely a symptom of more general challenges relating to, inter alia, imperfect patent quality, high patent litigation costs, and systemic information and risk asymmetries. Accordingly, we generally agree with the assessment voiced by Professor Shapiro that the appropriate focus of further reforms should be focused improvements to the patent system, including patent litigation, rather than the PAE business model itself.⁸

In sum, the challenges posed by PAEs are not solely or primarily caused by their business model or by their acquisition and assertion of patents. Rather, the high cost and unpredictability of patent litigation and imperfect patent quality allow PAEs, in some cases, to extract rents that exceed the incremental value of the technology covered by their patents. Addressing these challenges through targeted reforms would reduce the economic incentives of PAEs to engage in gamesmanship and to lie in wait seeking to “hold up” companies, thereby helping to resolve the problem of PAE litigation. Accordingly, we believe that the most appropriate and effective policy response is not to regulate PAEs or their behavior directly, but rather to adopt more general reforms of the types discussed immediately below.

__________
⁸ Presentation of Professor Carl Shapiro available at http://www.ftc.gov/opp/workshops/pae/docs/cshapiro.pdf.

One transaction that was discussed and sometimes mischaracterized, during the PAE Workshop is illustrative. In September 2011, MOSAID purchased a company known as Core Wireless S.a.r.l., and its portfolio of approximately 2,000 wireless patents. These patents were originally developed and held by Nokia. As the Nokia representative indicated during the workshop, it had spent many years and invested many billions of dollars in research and development to build a substantial patent portfolio in wireless communications. Core Wireless is now using MOSAID's specialized IP management and licensing model to unlock the monetary value within the Core Wireless portfolio. Under the arrangement with Nokia, Core Wireless independently conducts all of the licensing and, if necessary, enforcement efforts. Nokia, in turn, will share most of the revenues associated with the Core Wireless portfolio as these are realized.

As one can see from the Core Wireless example, MOSAID's goal is to license its patents, not to restrict access to those innovations by industry participants. We succeed and the innovators succeed when the technology we license is valued and adopted by our licensees; and those licensees, in turn, succeed in deploying that technology in the marketplace. These incentives are reflected in our licensing strategies, where we do not want to exclude others from using our technology or to impose license terms that will limit the success of our licensees. We also believe in transparent ownership of intellectual property and are clear about our ownership records.

As highlighted by the PAE Workshop, MOSAID is part of a complex and evolving business of IP development, implementation and licensing that is developing new business models and new markets for intellectual property. At MOSAID, we play a valuable role in linking the developers and users of certain patented technologies. We believe that the importance of this role will continue to grow in a world where the companies engaged in technological research, development and innovation may no longer be the same companies that are most successful in implementing that technology.

Think about the possibilities for collusion and antritrust. That's what Barnes & Noble accused Microsoft and Nokia of doing with the help of MOSAID. For example, while that entire linked page is worth reading, note particularly Exhibit E [PDF], from Cravath Swain to the DOJ back in 2011:

EXHIBIT E

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[Cravath, Swaine & Moore letterhead]

October 17, 2011

Microsoft/Nokia/MOSAID

Dear Gene:

Following up on our telephone call on Thursday, this letter provides some background concerning the recently announced horizontal agreement among Microsoft, Nokia, and MOSAID Technologies to license Nokia's wireless patents and split the proceeds. This is the latest in a series of tactics designed by Microsoft to raise its rivals' costs and prevent Android-based devices from taking away sales of Microsoft's Windows operating system. This description is based solely on publicly available information, and we suspect that nonpublic information relating to this agreement would be even more revealing.

On September 1, 2011, MOSAID announced that it had reached an agreement to acquire Core Wireless Licensing S.a.r.l., a patent holding company that held 2,000 Nokia patents related to wireless communications standards and implementation. MOSAID stated that it made "no upfront payments" for the patents,¹ and MOSAID reportedly received the patents for free.² MOSAID then announced that it had also reached an arrangement with Microsoft and Nokia regarding the licensing of those patents. Specifically, MOSAID will be responsible for asserting the patents against manufacturers of mobile devices such as cell phones, and MOSAID will hand over to Microsoft and Nokia 2/3 of any licensing revenue it obtains.³ Thus Microsoft will share in the profits even though Microsoft does not appear to have contributed anything of value to the arrangement.

____________

¹ Press Release, "MOSAID Updates Shareholders On Special Committee Process, Addresses Wi-LAN Mischaracterizations", Sept. 12, 2011, http://www.mosaid.com/corporate/news-events/releases-2011/110912.php

² Chris Velazco, "Mosaid Acquires 2,000+ Nokia Patents, Will Handle Licensing & Litigation For A Cut", Techcrunch, Sept. 1, 2011, http://techcrunch.com/2011/09/01/mosaid-acquires-2000-nokia-patents-will-handle-licensing-litigation-for-a-cut/

³ Id.

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The parties are not shy about the power they think is afforded to them under the deal. In MOSAID's words, "the force of this [patent portfolio] is overwhelming",⁴ and 3G and 4G wireless telecommunications standards" practice the patents.⁵ MOSAID believes that "four of the top five global cell phone vendors" will soon require a license, and MOSAID is targeting "over a trillion dollars of unlicensed revenues" of mobile devices.⁶ MOSAID boasts that it is an aggressive licensor of its patents, noting that it achieved "complete saturation" of the DRAM market and "licensed all the DRAMs on the planet at one point".⁷ Because MOSAID is a "non-practicing entity" -- the euphemism for a patent troll -- the usual threat of counterlitigation for patent infringement will have no deterrent effect on its aggressive licensing plans.

The deal is presumably related to Microsoft's horizontal agreement with Nokia, announced earlier this year, to coordinate their use of patents to drive out competitors. In February 2011, Microsoft and Nokia announced that Nokia would soon drop its Symbian operating system and instead adopt Microsoft's Windows Phone 7 as the operating system for its devices. The target of the agreement between Microsoft and Nokia is clear. As Nokia CEO (and former Microsoft executive) Stephen Elop stated shortly after announcing the deal, the "[n]umber one priority is to compete with Android."⁸ The new deal with MOSAID -- the negotiations for which began around the time the Microsoft-Nokia partnership was announced -- appears to be the mechanism by which Microsoft and Nokia will use Nokia's patents to attack Android devices.

The MOSAID deal is further evidence of Microsoft's broader plan to shield itself from patent lawsuits while also eliminating competition from Android. Obviously, since Microsoft and Nokia are parties to and beneficiaries of the agreement governing MOSAID's patent assertion activities, MOSAID will not be going after Nokia phones or other products using Microsoft's mobile operating systems. Instead, as Microsoft and Nokia have made clear, the primary target is Android. MOSAID, as guided by Microsoft, will now be able to assert the Nokia wireless patents against Android devices that threaten Microsoft's business.

____________

⁴ Interview, "John Lindgren, CEO of MOSAID talks magnitude of Nokia/Microsoft deal", Sept. 13, 2011,
http://www.youtube.com/watch?v=37yzFT9xpys.

⁵ Statement of MOSAID Vice President Dr. Nima Ahmadvand, "MOSAID acquires 2,000 Nokia Wireless Patents", Sept. 13, 2011, http://www.youtube.com/watch?v=Bdq3_jtOy_E (emphasis added).

⁶ Press Release, "MOSAID Updates Shareholders On Special Committee Process, Addresses Wi-LAN Mischaracterizations", Sept. 12, 2011, http://www.mosaid.com/corporate/news-events/releases-2011/110912.php; Interview, "John Lindgren, CEO of MOSAID talks magnitude of Nokia/Microsoft deal", Sept. 13, 2011, http://www.youtube.com/watch?v=37yzFT9xpys.

⁷ Interview, "John Lindgren, CEO of MOSAID talks magnitude of Nokia/Microsoft deal", Sept. 13, 2011, http://www.youtube.com/watch?v=37yzFT9xpys.

⁸ "Nokia Conversation: Q&A videos, break down", available at http://conversations.nokia.com/2011/02/22/qa-videos-break-down.

---

Microsoft's attempts to direct how others enforce their patents are part of Microsoft's strategy of attempting to maintain its monopoly in PC operating systems by controlling and dominating the Android operating system. Android, which Google gives away for free, threatens Microsoft's traditional business model of licensing its proprietary operating system because OEMs no longer need to pay for a high-quality operating system. In addition, the open source Android operating system is superior to Microsoft's proprietary products. For those reasons, Android threatens Microsoft's core business. Application-rich Android devices such as tablets and smartphones now perform many of the functions once reserved for PCs, a trend that will reduce demand for PCs and PC operating systems, where Microsoft's Windows enjoys a powerful monopoly. Moreover, as operating systems such as Android become more popular, Android will become a viable candidate for adaptation to PCs, putting Android (and its companion, Chrome) into direct competition with Windows. Moreover, Microsoft has announced plans to run its flagship Windows operating system on tablets, and the popularity of Android-based tablets threatens the dominance of Windows.

In response to these competitive threats, Microsoft is embarking on a campaign of asserting trivial and outmoded patents against manufacturers of Android devices. Microsoft demands exorbitant licensing fees (similar to the fee for the entire Windows Phone 7 operating system) and imposes licensing conditions that restrict manufacturers' abilities to upgrade and improve their products with features consumers want. Microsoft is attempting to raise its rivals' costs in order to drive out competition and to deter innovation in mobile devices.

Microsoft's arrangement with MOSAID and Nokia, in conjunction with its improper use of its own patents, is causing and will continue to cause serious harm to competition. Microsoft's conduct will raise costs to consumers, reduce the quality of popular goods, and impede innovation in a technology-rich market. Microsoft's conduct poses serious antitrust concerns and warrants further exploration by the Department of Justice.

Very truly yours,

[signature]

Peter T. Barbur

Gene I. Kimmelman, Esq.
Chief Counsel for Competition Policy and Intergovernmental Relations
Antitrust Division
United States Department of Justice
[address]

VIA ELECTRONIC MAIL AND FIRST-CLASS MAIL

II. Patent Transfers To PAEs Create Additional Perils

An accelerating phenomenon threatens to exacerbate the above-described harms and poses additional perils to competition and innovation. Although operating companies have consistently raised concerns about PAEs,⁵³ some such companies increasingly employ PAEs as patent enforcement surrogates. These operating companies sell or assign pieces of (or entire) patent portfolios to PAEs that then assert the acquired patents against the transferring company’s rivals. Put differently, although operating companies previously funded certain PAE activities and served as a well-spring for patents PAEs enforce,⁵⁴ operating companies are increasingly employing PAEs to strategic ends in new and evolving relationships.

The evolving relationships between operating companies and PAEs pose numerous distinct threats to innovation, competition and consumers. We describe several noteworthy harms below: (i) how transfers from operating companies to PAEs can harm innovation and raise rivals’ costs by altering enforcement incentives; (ii) how patent outsourcing arrangements can foster exploitation by facilitating evasion of no royalty stacking commitments in some industries; and (iii) how contractual arrangements between operating companies and PAEs can further exclusionary ends. Unfortunately, these are but a few examples of the many ways operating companies and PAEs interact that may implicate competition policy and our nation’s antitrust laws.⁵⁵

_________
⁵³ See , e.g., Tim Frain, Nokia Response to Patent Standards Workshop, Project No., P11-1204, at 5 (July 8, 2011), (“From a policy and regulator’s perspective, the role and impact of NPEs on legitimate enterprise perhaps deserves more careful attention.”), available at http://www.ftc.gov/os/comments/patentstandardsworkshop/00032-60891.pdf; Horacio Gutierrez, The SHIELD Act: Another Step in the Patent Reform Discussion, Technet (Feb. 27, 2013), http://blogs.technet.com/b/microsoft_on_the_issues/archive/2013/02/27/the-shield-act-another-step-in-the-patent- reform-discussion.aspx (“Microsoft is harassed by PAEs as much as anyone in our industry: at any given moment, we face as many as 60 PAE suits, comprising the vast majority of patent cases brought against us.”).

⁵⁴ See generally Tom Ewing & Robin Feldman, The Giants Among Us, 2012 STAN. TECH. L. REV. 1, at ¶¶ 4-5 (2012) (describing how operating companies funded PAEs and how “mass aggregators purchase large chunks, even the majority, of an operating company’s patents and patent applications”), available at http://stlr.stanford.edu/pdf/feldman-giants-among-us.pdf.

⁵⁵ Another harm not discussed at length here includes how certain PAEs’ accretion of massive patent portfolios might anticompetitively shield weak patents.

[ Update: A reader points out that the IPNav comments illustrate precisely the problem, so when you next read its comments in full, keep this in mind:

Similarly, patents are valuable intellectual property, and if someone steals an idea – infringes a patent without paying for it – the patent owner is damaged.

Here's the argument by IPNav, in full, as text:

Comments on Patent Assertion Entity Activities

Submitted by Barry Leff, IPNav, Dallas Texas
[email]

Summary

Patent assertion entities (PAEs) provide a valuable service to inventors. As Professor Chien said in her presentation, PAEs “give the little guy a chance.” An individual inventor or smaller entity, whether it’s a company, university, or NGO, generally does not have the resources or the expertise to enforce its patents. PAEs such as IPNav play an essential role in providing inventors a mechanism to receive compensation for their inventions which could otherwise be misappropriated by large companies with impunity.

We believe it is important to distinguish between “white hat” and “black hat” patent monetization:

• “Black hat” patent monetizers use “spam”-type methods to seek enforcement of weak patents where there is dubious infringement – casting a wide net in hopes that at least some targets will pay to settle rather than spend more money to defend themselves in court.

• “White hat” patent monetizers are the reputable players in the field – companies that only enforce valid patents where there is clear infringement.

Unfortunately, the reporting of “black hat” tactics has unfairly sullied the reputation of white-hat PAEs and has led to all PAE’s being lumped together under the pejorative label of “patent trolls.”

We agree with what Professor Shapiro said in his presentation: “Better to Fix the Flaws PAEs are Exploiting than to Attack the PAE Form.” Even though we are a PAE, we agree that patent quality should be improved. We also support fee-shifting, but to a true “loser pays” system as is common in Europe, not to the sort of biased and lopsided fee-shifting proposed by the SHIELD Act. These reforms would stop the “black hat” “patent troll” behavior while allowing real innovation to be rewarded.

About IPNav

IPNav is a “patent assertion entity.” Our business is patent monetization, and we help a wide variety of clients – from individual inventors to universities to corporations (large and small) – earn a return on their intellectual property. We are NOT a “non-practicing entity” (NPE) in that we do not take title to patents, although in some cases we will assist clients in selling their patents to an NPE.

IPNav, a privately-held, Dallas-based company, has been remarkably successful, generating over $600 million in licensing revenues for our clients over the last decade. We only work with clients who have strong patents that are commercially valuable. See our website, www.ipnav.com, for more information on the company and how we operate.

Introduction

We find it curious that the Department of Justice (DOJ) and the Federal Trade Commission (FTC) felt the need to convene a conference to explore the activities of patent assertion entities (PAEs) at all. A patent bestows one right on the inventor: the right to prevent others from using his or her invention. An inventor can allow others to use the invention for a fee. The patent grants the patent owner the right to sue entities that are using the invention without paying for it. So why is there a need to look into patent owners who are doing the only thing that their patent allows them to do?

Presumably the conference was called in response to public outcry over “patent trolls” as some sort of “tax on technology.” Certain members of Congress have decried “patent trolls” and regulatory agencies naturally pay attention to Congress.

Congressman Peter DeFazio, co-sponsor of the proposed “SHIELD Act,” said in a press release

Patent trolls don’t create new technology and they don’t create American jobs. They pad their pockets by buying patents on products they didn’t create and then suing the innovators who did the hard work and created the product. These egregious lawsuits hurt American innovation and small technology start ups, and they cost jobs. My legislation would force patent trolls to take financial responsibility for their frivolous lawsuits.

It was nice that at the conference the chairman of the FTC, Jon Leibowitz, chose to be polite: he said “we all know a few colorful street names for PAEs, but we are not going to use any of them today.”

However, he let his biases slip in his opening remarks to the conference, where he said

...Not surprisingly, others believe that PAE activity imposes a “tax on innovation,” undermining the incentives to engage in R&D. Detractors also raise concerns about operating companies transferring IP to PAEs as a means of raising rivals’ costs. If that is actually happening – perhaps because of asymmetries of information and liability – it would seem, well, kind of unsavory.

We disagree with Congressman Defazio that “patent trolls” hurt American innovation, and we disagree with Chairman Leibowitz that enforcing patents through PAEs is somehow “unsavory.”

PAEs – Good for America, or Bad for America?

Several of the presentations at the conference addressed the question of whether or not PAEs are a good thing. Professor Chien’s paper includes a section “Case Study: Harms/Benefits to Startups.” Professor Shapiro’s paper includes a section on “What Do We Really Know About the Impact of PAEs on Innovation?”

It seems a little odd that this question even needs addressing. What makes patent monetization as an industry worthy of such special consideration? Do the DOJ and FTC consider whether soft drink manufacturers are a good thing? Video game manufacturers? Dairy farms? Tobacco companies? In the American system, consumers determine which businesses are worthwhile – by voting with their dollars.

In his comments, Lee Cheng of Newegg sees PAEs (he prefers to call them “patent trolls”) as evil. Cheng writes

Never mind that the patent troll does not participate in the marketplace for the patented invention, or even compete with the company that it is suing, and that therefore the patent troll suffers no actual harm even if infringement of the patent is actually occurring.

Cheng seems to be suffering from a too-common view that committing intellectual property piracy is somehow a “right” and that pirates should be protected against lawsuits by IP owners. The misconception is that as an intangible, intellectual property cannot be “stolen” because the owner of the IP suffers no “actual harm” From the theft. That’s simply not true. Ask the software, music, or movie industries how much they have suffered “actual harm” because people stole their IP.

Similarly, patents are valuable intellectual property, and if someone steals an idea – infringes a patent without paying for it – the patent owner is damaged. The patent owner is not receiving the income he or she is entitled to. Knowingly infringing a patent that a manufacturer knows is valid is a blatant case of theft.

Patent owners are under no obligation, moral or legal, to manufacture whatever product or idea is covered by their patent. As we pointed out in a blog post [http://www.ipnav.com/blog/was-thomas- edison-a-patent-troll/]

Thomas Edison is considered America’s greatest inventor. He’s also one of the most prolific, with 1,093 US patents in his name. Like Blanchard [an earlier inventor who made money without making stuff], he got his start by selling the technology he invented – not by manufacturing his inventions. He built his industrial research lab in Menlo Park, New Jersey with the proceeds from selling his quadraplex telegraph to Western Union for $10,000 – the equivalent of over $200,000 today.

Ericsson was once one of the big names in the cell phone business. With its recent sale of its interest in Sony Ericsson, the company is no longer in the business of making cell phones. Does that mean the company is no longer entitled to earn money from the many millions of dollars it invested in smartphone R&D? Does that mean it should be forced to hand over its valuable intellectual property for free because it no longer “participates in the marketplace for the patented invention”?

Many highly creative individuals, universities, and businesses can come up with great inventions that benefit society, but are not in a position to physically produce the inventions. It is not impossible to imagine that an individual inventor could come up with an idea that would be an extremely valuable smartphone feature, yet not able to go into the business of making smartphones. Nor would it be a good idea for every inventor of a smart-phone feature to make smartphones -- one good feature does not make a product.

By leveling the playing field to some extent – by giving inventors the ability to hold their own against large companies that might otherwise steal their intellectual property – PAEs encourage innovation.

If an inventor is not willing to aggressively assert the rights granted by a patent – in court – the patent is of limited value. PAEs help inventors by giving them access to the specialized skills and financial resources that are needed to protect their intellectual property.

“White Hat” versus “Black Hat” Patent Monetization

The idea of “white hat” versus “black hat” activities is found in several different industries. Most similar to patent monetization is the situation found in search engine optimization (SEO).

Google and other search engines have complex algorithms for deciding which websites get highly ranked for different search terms. This has spawned an SEO industry dedicated to helping clients improve their ranking for valuable search terms.

Naturally, the search providers want to give the viewing public results that are actually useful – links to websites that have exactly what they are looking for, and that other people consider good websites. So measures such as number of links to a website, or amount of content on a website, are known to be part of the algorithms.

“White hat” SEO businesses work with their clients to do what the search providers want: they add quality content, make content search-friendly, find quality websites that should link to them, etc.

“Black hat” SEO businesses try and scam the system. Google wants links? They hire cheap labor in India or the Philippines to spam comments on blogs with links. Google likes websites that have more fresh content? They hire armies of people, again in cheap labor locations, to crank out “content” that no one in his right mind would want to read, often stuffed with so many keywords as to be unreadable.

The search providers take measures to penalize “black hat” SEO while encouraging “white hat” SEO.

Similarly, in the patent monetization business, there are companies that do “black hat” patent monetization. They buy up hundreds of weak patents, send thousands of threatening letters, sometimes to companies that are not infringing even a weak patent, and offer to settle for a royalty far lower than the cost of defending a patent lawsuit. They are scam artists trying to make a buck off the “nuisance value” that companies would rather pay a relatively small amount to make them go away than go to the expense of going to court.

“White hat” patent monetizers, on the other hand, are reputable firms that either work with legitimate inventors, or buy patents from legitimate inventors, and that litigate or threaten litigation only against companies that are actually infringing a valid patent.

Condemning all PAEs on the basis of the behavior of the “black hat” PAEs would be like condemning the entire SEO industry because of the companies that are in business to scam search engines. In the case of patent monetization, the government does not need to interfere with the legitimate businesses to stop the scam artists.

Antitrust and Patents

There has been a substantial increase in patent litigation over the last few years. Does this point to anticompetitive behavior? Are there antitrust issues surrounding patents? Certainly, but for the most part the problem is with operating companies, not with PAEs.

If an operating company that holds a standard essential patent (SEP) refuses to license that patent under the normally required “fair, reasonable, and non-discriminatory” (FRAND) terms it could be engaging in anti-competitive behavior. When such an operating company seeks sales injunctions against competitors, it is because they want to increase their market share. When a PAE asserts a patent, it’s not looking to stifle competition: it’s looking to get paid for its intellectual property.

Conclusion

PAEs provide a valuable service to inventors, and thus encourage innovation. Patent monetization is a legitimate business which requires highly specialized skills and deep financial resources. There have been some problems – abuses even – but the way to address them is, as Professor Shapiro pointed out in his paper, is to address the flaws rather than to attack a particular class of patent owner. There are two fixes that could help a great deal:

• Strengthen the patent system. Some weak patents have gotten through the system, and some patent owners (not just PAEs) have exploited the fact that defending one’s self against even a weak patent is an expensive proposition.

• Go to a “loser pays” system, as is common in Europe, where the loser of a court case pays the legal expenses of the winner.

It should be noted that by “loser pays,” we are not talking about the “half step” proposed by the SHIELD Act, which would only award costs including legal fees against an entity that brings a lawsuit alleging patent infringement that “did not have a reasonable likelihood of succeeding.”

Some companies infringe patents and knowingly attempt to drag a court case out, hoping that the patent owner will not have the patience or resources to stay with it. A true loser pays system, as is common in Europe, would reduce the likelihood of “black hat” PAEs trying to enforce very weak patents, or trying to get a settlement where there is no infringement. It would also encourage companies in a situation where there is clear infringement of a valid patent to settle rather than to fight it out in litigation.

The Constitution grants Congress the power “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries...” Inventors are granted exclusive right to their discoveries – rights which they are also free to sell – without regard to the business model they use in commercializing their invention. A patent owner is a patent owner, and all patent owners have the same rights, whether they are operating companies, non-practicing entities, universities, non-profits, or individuals.