Patent Assertion Entities and Competition Policy

Patents, Intellectual Property and Competition Policy and Antitrust

Article Snapshot

Author(s)

Daniel Sokol

Source

Cambridge University Press, 2017

Summary

Firms that own and license patents but do not produce anything are known as patent assertion entities (PAE), or patent trolls. PAE can harm competition and innovation. This book collects studies of PAEs and competition policy from the United States, China, Korea, and Europe.

Policy Relevance

Patent trolls charge high royalties that tax innovation. “Loser pays” rules, antitrust, and changes to patent law would discourage patent trolls.

Main Points

  • PAEs are non-producing (“nonpracticing”) entities (NPEs); PAEs do not make products themselves, but rather make money by licensing patents, or by suing or threatening to sue firms that use the patented technology to make products.
     
    • Some NPEs are helpful, making it easier for inventors and producers to find each other and negotiate license agreements.
       
    • PAEs are harmful because they charge excessive royalties, raising prices and taking an unfair share of innovative firms’ profits.
       
  • There are three types of PAEs.
     
    • Some seek low-value quick settlements, without pushing for a trial.
       
    • Some take hard cases with high stakes against large companies, hoping for a big payout.
       
    • Some PAEs aggregate large numbers of patents into a portfolio (privateers).
       
  • PAEs cost producers and operators about $80 billion a year; this cost does not include non-monetary costs of PAEs, such as the need to add contractual terms to limit litigation risk.
     
  • PAEs tend to litigate cases more often than practicing entities; it can be hard to avoid PAE lawsuits, as some conceal the contents of their portfolios in shell companies.
     
  • NPEs tend to make demands based on weak patents; NPEs succeed in only 9.2 percent of cases that go to trial, compared to 40 percent of practicing entities.
     
  • Some PAEs are “hybrids” of practicing and nonpracticing firms, acquiring patents from an allied firm, and then asserting the patents against a rival to raise the rival’s costs, a practice known as privateering; antitrust law should be used to limit this behavior.
     
  • The Federal Circuit could reduce harm from PAEs by changing immunity rules that protect firms that make false claims in patent demand letters; governments could then regulate letters that make false or deceptive statements to intimidate recipients into purchasing a license.
     
  • PAEs are most problematic in the United States.
     
    • PAEs are less common in Europe and Asia because of different rules for calculating damages, and the rule that the loser must pay the costs of a lawsuit (“loser pays” rules).
       
    • Competition law in Korea, Japan, Taiwan, and China can help control PAEs.
       

 

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