Patent Assertion Entities: Friend or Foe?

August 15, 2013

In March 2011, the Federal Trade Commission (FTC) released its antitrust policy review of the patent marketplace. In the report it unveiled the term "patent assertion entities" (PAEs) as a substitute for the derisive term "patent trolls." According to the FTC, a PAE describes a business model that "focuses on purchasing and asserting patents against manufacturers already using the technology (after infringement and lock-in have occurred), rather than developing and transferring technology" to licensees, thus simply transferring a legal right not to be sued for the transfer of money, says Thomas A. Hemphill, an associate professor of strategy, innovation and public policy at the University of Michigan-Flint's School of Management.

PAEs are differentiated from the broader technical term of "non-practicing entities" (NPEs), which can include development firms that offer their patented technologies to licensees in advance, university research laboratories, and licensing agents that offer enforcement and negotiation services for patent owners, technology entrepreneurs (some failed), and major technology companies spinning off their patents to capitalize on their value.

  • Critics of PAEs argue that they impose a de facto tax on innovation that undermines the intent of the U.S. patent system and that they extract financial compensation through systematic plaintiff overcompensation from innovating companies.
  • PAEs also, the critics tell us, prevent companies from knowing which patents are covered (thus enabling "ex post" licensing demands), are not constrained by exposure to counter-claims or reputational effects of abusive practices, and create costly, time-consuming barriers for U.S. businesses (especially small, entrepreneurial businesses) to release new, innovative products to the American consumer.

In contrast, supporters of the PAE business model argue that these entities promote innovation by enhancing the value of patents, thus monetizing the reward to the inventor. Proponents also claim that PAEs offer lower search and bargaining costs, add a high degree of liquidity that increases innovation incentives, improve the business environment for risk management of investments in research and development activities, and ensure that financial compensation is received by entrepreneurial inventors by licensing, licensing and selling back, and securitizing their patents.

There is growing evidence of an emerging bipartisan effort in the 113th Congress to legislatively address many of the most egregious issues related to PAE abuses. In the first six months of this Congress, there have been six proposed bills addressing PAE activities introduced. Serious congressional policy debate likely will begin in this fall's session, reflecting a significant opportunity to develop a common legislative agenda on Capitol Hill for much needed, focused bipartisan patent law reform addressing PAE litigation abuse.

Source: Thomas A. Hemphill, "The Paradox of Patent Assertion Entities," The American, August 12, 2013.

 

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