TAP Scholars Explore Patent Litigation with NPEs, PAEs, and SEPs

Two recent papers by TAP scholars examine patent litigation.

In A Model of Patent Trolls, Professors Jay Pil Choi and Heiko Gerlach seek to understand litigation strategies used by non-practicing entities (NPEs). The authors show that when an NPE faces multiple potential infringers who use related technologies, it can gain credible threat to litigate even when it has no such credibility vis-a-vis any single potential infringer in isolation.

Professors Carl Shapiro and Fiona Scott Morton provide an economic analysis of Patent Assertion Entities (PAEs) and Standard-Essential Patents (SEPs) following the 2011 America Invents Act (AIA). In “Patent Assertions: Are We Any Closer to Aligning Reward to Contribution?,” the authors examine the alignment between the rewards provided to patent holders and their social contribution for PAEs and SEPs.

For those that could use the clarity, here is a quick explanation for the NPE, PAE, and SEP acronyms.

• Nonpracticing Entities (NPEs) refers to a patent holder that does not practice its patents. For some NPEs, the primary reason for non-practicing is lack of resources or public interest. This includes universities, research institutes, non-profit organizations, start-ups, and some individual inventors.
• Patent Assertion Entities (PAEs) are a type of NPE; however, PAEs do not practice patents because their business model is based primarily on buying patents and then attempting to generate revenue by asserting them against businesses that are already practicing the patented technologies. A less neutral term for PAEs are ‘patent trolls.’
• Standard-Essential Patents (SEPs) are patents for technologies that are required to implement a technology standard. In order for one device to interoperate with another, certain norms must be set in place. The two devices must use the same standardized products and processes to enable communication; much in the same way that human conversation requires participants to agree on which language to speak. Standard setting organizations (SSOs) exist as one way for patent owners and stakeholders to agree on which products and processes will become standardized.

A Model of Patent Trolls

By Jay Pil Choi, Michigan State University, and Heiko Gerlach, University of Queensland

Abstract:

This paper develops a model of patent trolls to understand various litigation strategies employed by nonpracticing entities (NPE). We show that when a NPE faces multiple potential infringers who use related technologies, it can gain a credible threat to litigate even when it has no such credibility vis-à-vis any single potential infringer in isolation. This is due to an information externality generated by an early litigation outcome for subsequent litigation. Successful litigation creates an option value against future potential infringers through Bayesian updating. This renders a credible litigation threat against the initial defendant and allows the NPE to extract more rents. We discuss policy implications including the adoption of the British system of “loser-pays” fee shifting and the use of injunctive relief.

Jay Pil Choi is University Distinguished Professor at Michigan State University and Scientia Professor at the University of New South Wales. His areas of expertise include intellectual property rights, economics of network effects, and antitrust economics. He currently serves as co-editor for the International Journal of Industrial Organization, and is on the editorial board of the Information Economics and Policy, International Telecommunications Policy Review, and Journal of the Korean Econometric Society.

Patent Assertions: Are We Any Closer to Aligning Reward to Contribution?

By Carl Shapiro, Haas School of Business at the University of California at Berkeley, and Fiona Scott Morton, Yale School of Management

Abstract:

The 2011 America Invents Act was the most significant reform to the United States patent system in over fifty years. However, the AIA did not address a number of major problems associated with patent litigation in the United States. In this paper, we provide an economic analysis of post-AIA developments relating to Patent Assertion Entities (PAEs) and Standard-Essential Patents (SEPs). For PAEs and SEPs, we examine the alignment, or lack of alignment, between the rewards provided to patent holders and their social contributions. Our report is mixed. Regarding PAEs, we see significantly improved alignment between rewards and contributions, largely due to a series of rulings by the Supreme Court. Legislation currently under consideration in Congress would further limit certain litigation tactics used by PAEs that generate rewards unrelated to contribution. We also see some notable developments relating to SEPs, especially with the recent reform to the patent policies of the IEEE, a leading Standard-Setting Organization (SSO) and with several recent court decisions clarifying what constitutes a Fair, Reasonable and Non-Discriminatory (FRAND) royalty rate. However, other steps that could better align rewards with contributions on the SEP front have largely stalled out, particularly because other major SSOs do not seem poised to follow the lead of the IEEE. Antitrust enforcement in this area could further improve the alignment of rewards and contributions.

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 was the Deputy Assistant Attorney General for Economics at the Antitrust Division of the U.S. Department of Justice from 2009 to 2011 as well as from 1995 to 1996. And from 2011 to 2012, he served as a Member of the President’s Council of Economic Advisers. This Council of Advisers is charged with offering the President objective economic advice on the formulation of both domestic and international economic policy.