TAP Scholars Discuss Patent Assertion Entities

By TAP Staff Blogger

Posted on April 23, 2013


Patent Assertion Entities (PAEs) are a hot topic in antitrust circles. A few months ago, The Federal Trade Commission (FTC) and the Department of Justice (DOJ) hosted a joint workshop to explore the impact of patent assertion entity (PAE) activities on innovation and competition and the implications for antitrust enforcement and policy. These two agencies also held a comments period on PAE activities. Additionally, at the end of February, Representatives DeFazio (D-Ore)and Chaffetz (R-Utah) introduced the Saving High-tech Innovators from Egregious Legal Disputes (SHIELD) Act, which creates a “losing plaintiff patent-owner pays” litigation system in order to protect innovators from patent licensing companies (PAEs, also referred to as patent trolls) that purchase and license patents, and sue infringers when infringers refuse their requests to license.

Professor Daniel Sokol, University of Florida, hosted a blog symposium on the Antitrust & Competition Policy Blog to delve into the issues surrounding PAEs and their impact on innovation and competition. Several TAP scholars participated in the Blog Symposium on Patent Assertion Entities; excerpts from their posts follow.

First however, for those that could use the clarity, an explanation of what a patent assertion entity is and is not. The following is taken from FTC Chairman Jon Leibowitz’s opening remarks at the Patent Assertion Entity Activities Workshop:

What PAEs are:

  • PAEs focus on purchasing patents from existing owners.
  • PAEs make money by licensing the intellectual property to, or litigating against, manufacturers who are already using the patented technology.

What PAEs are not:

  • PAEs are not the more general nonpracticing entity, or NPE.
  • The term NPE includes any entity that does not manufacture or sell products that use it to patent technology.
  • For example universities: they conduct research, they patent their innovations, and they work with companies who seek to include their technology to improve products.


Holding Out or Holding Up?


In “Holding Out or Holding Up?,” Professor Colleen Chien welcomes the FTC and DOJ’s examination of the PAE business model. In addition to focusing on the antitrust concerns, Professor Chien advocates for also understanding the impact of PAEs on companies, patent courts, and patent agencies directly affected by patent-assertion entity activity. Specifically, Professor Chien seeks insight into:

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.

Professor Chien believes a lot can be gained by “following the money:”

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.

Colleen Chien is Assistant Professor at Santa Clara University School of Law. She is nationally known for her research and publications surrounding domestic and international patent law and policy issues.


Patent Assertion Entities: Costs and Benefits


James Bessen and Professor Michael Meuer examine the positive and negative effects of PAEs in “Patent Assertion Entities: Costs and Benefits.” The authors first asked: how much do PAEs cost the firms they attack? They performed three different estimates using different samples, different methods, and different definitions of PAEs:

  • Publicly Listed PAEs: the 5,307 defendants counted in 2011 come to aggregate estimated payments to PAEs of $20 billion.
  • Defendant Firms: the 5,842 firms defending PAE assertions in 2011, including accrued costs and legal expenses, comes to $29 billion.
  • Lost Wealth of Publicly Listed Defendants: “…it includes lost profits, including discounted value of future profits that might be affected by the lawsuit. Defendant lose profits aside from direct payments to PAEs and legal costs; management and engineering resources might be distracted from business needs because of the suit, customers may cancel or delay purchases, firms might postpone innovative improvements. … Our event studies provide an estimate of annual lost wealth of about $80 billion.”

Bessen and Meuer then worked to quantify how much PAEs benefit inventors.

We find that royalty payments and patent acquisition costs paid to independent inventors averaged $59 million (in 2010 dollars) per year for these firms. Many of these third party inventors, however, were large firms — researchers have found that 45% of PAE patents come from large firms. These figures pale in comparison to the costs that patent suits by these firms imposed on defendants—$1.2 billion in out-of-pocket costs per year and annual business costs to defendants were much larger based on our event study estimates. Even internal R&D expenditures by PAE firms, averaging $169 million per year, do not change the picture.

James Bessen is currently Lecturer in Law at Boston University School of Law where he does research on the economics of technological innovation, including patents and Free/Open Source Software. As an economics researcher, a former software developer and CEO, he brings a unique perspective to the study of innovation.

Michael Meuer is Professor of Law with Boston University School of Law. He teaches courses in patents, intellectual property, and public policy toward the high-tech industry.


Lemley and Shapiro on Patent Assertion Entities


Professors Mark Lemley and Carl Shapiro focus on standard-essential patents and their proposal to require patent holders who agree to license their patents on reasonable terms to submit to arbitration with any willing licensee to determine the reasonable rate. In their submission to this patent assertion entities symposium, Professors Lemley and Shapiro discuss their recently released paper, “A Simple Approach to Setting Reasonable Royalties for Standard-Essential Patents:”

Standard-setting organizations have been unable to clean up and clarify their intellectual property rules, even though many of the ambiguities and flaws in these rules have been recognized for a decade or more. Our hope is that several forces will now combine to make progress possible: (1) a desire by many market participants to avoid the growing legal costs and uncertainty associated with existing rules; (2) the availability of a package of reforms that will greatly reduce these costs while promoting the basic goals of FRAND regimes; and (3) the growing risk that failure to act will create antitrust liability, as competition authorities increasingly signal their willingness to intervene.

Mark Lemley is the William H. Neukom Professor of Law at Stanford University School of Law. He is widely recognized as a preeminent scholar of intellectual property law. Professor Lemley’s contributions to legal scholarship focus on how the economics and technology of the Internet affect patent law, copyright law, and trademark law.

Carl Shapiro is the Transamerica Professor of Business Strategy at the Haas School of Business and Professor of Economics in the Economics Department at the University of California, Berkeley. His current research interests include antitrust economics, intellectual property and licensing, patent policy, product standards and compatibility, and the economics of networks and interconnection. Professor Shapiro took a leave from Berkeley to serve as a Member of the President’s Council of Economic Advisers from 2011 to 2012. The Council of Economic Advisers is charged with offering the President objective economic advice on the formulation of both domestic and international economic policy.