Patent Assertion Entities & Privateers: Economic Harms to Innovation and Competition

AuthorRobert G. Harris
DOI10.1177/0003603X1405900204
Published date01 June 2014
Date01 June 2014
Subject MatterArticle
THE ANTITRUST BUL L E T I N :Vol. 59, N o. 2/Summ er 2014 :281
Patent assertion entities &
privateers: Economic harms to
innovation and competition
BY ROBERT G. HARRIS*
This article assesses aggressive rent-seeking activities by patent asser-
tion entities (PAEs), especially in patent-thick industries. Patent thick-
ets are “target-rich” environments, providing ample opportunities for
rent-seeking and abuse of patents by PAEs. Fundamental differences
in the strategic interests of practicing entities (PEs) and PAEs increase
the opportunities for, and economic harm caused by, PAEs engaging
in patent hold-up. PAEs exploit deficiencies in patent policy and
enforcement, including the use of injunctions, excessive damages
awards, and costly settlements stemming from actual or threatened
litigation, the high cost of which increases “hold-up value.” The arti-
cle also examines the threat to competition and innovation caused by
“privateering”: the transfer of patents from PEs to PAEs. While there
© 2014by Federal Legal Publications, Inc.
* Professor Emeritus, University of California, Berkeley, and Senior
Consultant, Charles River Associates, Washington, DC. (CRA).
AUTHOR’S NOTE: An earlier version of this article was presented to the Seventh
Annual Glob al Antitrust S ymposium at G eorgetown Law S chool, Septe mber 25,
2013. I am grateful to BlackBerry Ltd. and Google, Inc. for financial support of a lit-
erature search on these issues; to Kirsten Harris, Lubomira Ivanova, Adam Roberts,
and Paul Rotilie for their excellent research assistance; to Alden Abbott, George
Addy, Matthew Bye, Susan Creighton, Erika Douglas, Robin Feldman, John
Harkrider, Michael Laufert, and Mark Popofsky for helpful comments; and to Robert
Levinson for his excellent editorial guidance. This article reflects my views alone. It
does not necessarily represent the views of any officer or employee of CRA, or those of
any other Senior Consultant to CRA. I am responsible for errors.
may be limits on the use of ant itrust to moderate all of the h arms
caused by PAEs, cases involving privateering are ripe for investiga-
tion, prosecution, and remedy by enforcement agencies and private
antitrust actions.
KEY WORDS:patent licensing, technological change: government policy,
innovation and invention: processes and incentives, intellectual property
rights, anticompetitive
I. OVERVIEW
This art icle add resses the proble ms of aggressive re nt seeki ng by
patent assertion entities (PAEs). These problems are widespread and
growing rapidly: “Over a decade the amount of [nonpracticing
entity]1litigation has grown from less than 5% of all U.S. patent litiga-
tion to over 60%.”2M oreover, PAEs are increasingl y targeti ng the
most innovative sector of our economy, startups. Robin Feldman’s
recent survey of venture capitalists and startups found that seventy
percent of the venture capitalists have portfolio companies that have
received patent demands, with roughly one in three startup compa-
nies reporting such demands. She also found that the “vast majority
of patent demands against the startup companies come from entities
that license or litigate patents as their core activity.”3
This article is especiallyconcerned withactions of PAEs whenpatent
thickets and patent-thick products and systems are present. Patent thick-
ets are “target-rich” environments that are particularly attractive to
PAEs, because they provide ample opportunities for rent-seeking and
282 :THE ANT I T R U S T BULLETIN:Vol. 59, No. 2/Summer 2014
1Though different authors use different terms and define those terms
differently, this article uses the term PAEs throughout—except when quoting
from other sources—to include nonpracticing entities and patent monetiza-
tion entities.
2James Bessen & Michael J. Meurer, The Direct Costs FromNPE Disputes,
99 CORNELL L. REV. 29 (forthcoming 2014), available at http://papers.ssrn.com
/sol3/papers.cfm?abstract_id=2091210.
3Robin Feldman, Patent Demands & Startup Companies: The View from the
Venture Capitalist 2 (U. Cal. Hastings Research Paper No. 75Dec. 1 8, 2013),
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2346338.
abuse of patents.4Section II will explain why aggressive patent assertion
is particularly harmful in patent-thick products and systems, such as
computers, smartphones, and software. It will also explain why techno-
logical developments will almost certainly increase the number and
“density” of patent thickets, thereby providing even more target-rich
environments for PAEs, as well as the magnitude of economic rents that
can be earned by aggressivepatent assertion activities.
While there are admittedly instances of patent abuse by practicing
entities (PEs), this article focuses on problems caused or exacerbated
by PAEs in patent thickets and by the transfer of patents from PEs to
PAEs. Section III addresses the fundamental differences in the strategic
positions and interests of PEs and PAEs, and explains why those dif-
ferences affect the conduct of PAEs and increase the opportunities for,
and economic harm caused by, their rent-seeking conduct and efforts
to engage in patent hold-up. This section also lays the foundation for
section VI, a discussion of the anticompetitive harm that can be caused
when PEs transfer patents to PAEs. I focus on instances where PAEs
have incentives, as the results of such asset transfers, to assert the
transferred patents against competitors of the PEs that originally had
owned the patents. This has been termed patent privateering.5
Given these strategic differences between PEs and PAEs and the
rapid growth in target-rich patent thickets, it is not surprising that
there have been significant increases in the number of PAEs, the num-
ber of patents owned by PAEs, and the number of patent assertions
and lawsuits by PAEs. While PAEs cause harm by exploiting flaws in
the patent system,6they compound that harm through the process of
EC O N O M I C HA R M S :283
4For this reason, the term patent minefield may be a more descriptive
term than patent thicket.
5Thomas L. Ewing, Indirect Exploitation of Intellectual Property Rights by
Corporations and Investors,4HASTINGS SCI. & TECH. L.J. 1 (2011).
6Jorge Lemus & Emil Temnyalov, Patent Assertion and the Rate of Innova-
tio n 51 (O ct . 31, 2 013 ), a vai la ble a t http://ssrn.com/abstract=2308136
(“[T]hink of trolls as opportunists that exploit and thereby illuminate flaws in
the patent system . . . . Patent reform can then be focused more appropriately
on the systemic issues that give rise to patent trolls—on granting patents only
to those who develop nonobvious inventions and providing remedies for
infringement that are commensurate with the scope of the invention.”).

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