The Harmful Practice of Patent Privateering

Keith Farrell
Posted: Oct 20, 2014 12:01 AM
The Harmful Practice of Patent Privateering

A new type of business is earning a lot attention, though critics say they are perverting the market, abusing intellectual property laws, and hindering competition and innovation at cost to the consumer. Patent Assertion Entities (PAEs) — or, as they are commonly referred to, "patent trolls” — are companies that exist for the sole purpose of acquiring patents and then asserting them through litigation. Independent PAEs tend to acquire obscure patents with the aims of enforcing the patents infringement. More and more, however, PAEs are being empowered by large corporations, being given or sold valuable patents for the express purpose of attacking competition, and bogging it down with litigation.

The practice is called “patent privateering,” and it occurs when a large company either sets up a shell company or finds a PAE that has proven its ability to monetize patents and then transfers major patents to that entity. The third party that then owns the patent is often partly owned by the original patent holder or has an agreement to share the royalties and legal damages with the original owner. The term “privateer” is apt for the practice, as it comes from a time when governments would contract independent mariners to attack and plunder the vessels of their enemies.

Proponents of the practice claim that patent infringement is rarely pursued by corporations due to the time and costs it requires to enforce. PAEs are a way for corporations to enforce patent ownership without having to expend capital which could be allocated elsewhere. Supporters say that patents are assets, and PAEs allow companies to cash in on those assets.

But critics charge that the practice is a perversion of the patent system. Patents are designed to spur innovation and to protect the returns of innovators, not to be used as weapons to stifle competition. Companies are able to use PAEs to attack their competition, causing them to spend time, attention, and exuberant legal fees to defend themselves. Often, to avoid such litigation nightmares, the company being sued will settle with the PAE, even if the patent claim is weak or erroneous. PAEs also seek injunctions against other companies, shutting down innovation and stifling competition. Another way companies can appease PAEs is by working out complex, costly licensing agreements. In any case, companies targeted by PAEs have little recourse and have to pay the troll one way or another, making the practice legal extortion.

If a company were to sue another company on erroneous patent claims, they would risk a countersuit as well as damage to their public image. Often, rather than pursue such channels, companies instead opt to negotiate a licensing agreement with the other company. But with PAEs, a company can have a third-party attack its competition and be completely shielded from countersuit. Because transparency regarding PAE ownership is so opaque, litigators, judges, and the public are often unable to determine ownership. The public image of the original patent holding company is therefore able to remain undamaged even as they pursue deplorable business tactics.

Patents were never intended to be monetized. The practices of PAEs undermine the patent system by turning tools of innovation into weapons of litigation. Being used in this manner, patents no longer serve to spur innovation but to stifle it. They no longer represent exclusive rights to an innovation; they are now a tool to be monetized through malicious litigation. It is the consumer who pays the most through lack of choice due to less competition and added costs to products. Patent privateering hurts everyone at an annual cost of around $29 billion domestically which falls squarely on the shoulders of the consumer.

The House Judiciary Committee, Department of Justice, and The Federal Trade Commission are currently looking into patent privateering. It is a sector of the economy that badly needs regulation. Increased transparency surrounding PAE ownership would tie the original patent holders to the PAE, thereby making the original patent holder vulnerable to countersuits. Another way to curb the harmful practice of patent trolls would be to make them liable for the legal costs of the companies they sue if they lose the suit. These regulations would increase transparency and decrease frivolous patent suits which waste capital and unfairly tilt the competitive field.