Patent Investment Trusts: Let’s Build a Pit to Catch the Patent Trolls
| Publication year | 2004 |
| Citation | Vol. 6 No. 2004 |
troll (tr¨l) n. In Norse Mythology, repulsive dwarfs who lived in caves or other hidden places. They would steal children and property but hated noise.1
I. Introduction
Peter Detkin, the assistant general counsel for Intel, coined the term "patent trolls" in the late 1990s, to describe his own impression of this new legal dwarf.2 According to Detkin, a patent troll is "somebody who tries to make a lot of money off a patent that they are not practicing and have no intention of practicing and in most cases never practiced."3 In a business that collects more than $100 billion annually in licensing fees,4 these patent trolls are taking an ever increasing piece of the licensing pie for themselves,5 much to the chagrin of their prey.
In the past fifty years, the range of patentable subject matter has expanded exponentially.6 Today, patents are issued for software, genetic information, and even business methods.7 The number of patents issued annually has more than tripled in the past two decades8 to 169,296 in 2004.9 Additionally, intellectual property portfolios (of which patents are a major part) have become valuable assets for businesses and important tools in attracting investment and venture capital.10 Modern patents have an intrinsic value beyond merely the right to exclude competitors¡ªthey serve as powerful marketing tools11 and can have the same influence on a corporation's bottom line as tangible property assets.12 In fact, today's intellectual property is a key corporate asset precisely because it may be the primary driver of revenue.13
The rising speculation in intangible assets by patent trolls may indicate that patents are ready to evolve to the next level. Just as air space rights and carbon emissions before them, patents could be traded on stock exchanges. This evolution could take the form of a Patent Investment Trust, modeled on the popular Real Estate Investment Trust ("REIT"). By authorizing a Patent Investment Trust ("PIT"), the United States Congress could help create a public market based on patents and patent licensing, harnessing market power to provide capital for inventors and stabilizing speculation through more accurate patent prices and licensing fees.
II. Background
A. Patent Law
The Constitution of the United States authorizes the federal government to issue patents.14 According to Article I, Congress may "promote the Progress of Science and useful Arts by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."15 To that end, Congress passed a series of Patent Acts, beginning with the Patent Act of 1790 and most recently with the Patent Act of 1942.16 For an invention to be patentable, the Patent Act states that the invention must "(1) constitute 'patentable subject matter,' (2) meet the technical requirements for patentability, which require that the invention be 'new,' 'useful,' and 'non-obvious,' and (3) disclose a written description of an invention including the best mode of carrying it forth."17
In exchange for disclosing such an invention, the United States government grants the inventor the right to exclusive use of the invention for a period of twenty years from the patent application filing date.18 Thus, the United States Supreme Court stated that the patent system "embodies a carefully crafted bargain" between the inventor and society by encouraging the disclosure of patentable inventions in return for the "exclusive right to practice" for a period of years.19 Further, the Court has stated that Congress intended patentable subject matter to "include anything under the sun that is made by man."20 However, the Court has limited patentability by excluding laws of nature, natural phenomena, abstract ideas, and mathematical formulas from patentable subject matter.21
The explicit goal for patents in the Constitution is to promote the arts and sciences.22 However, legal theorists argue that in reality the goal of the patent is three-fold: (1) an incentive for inventors to invent; (2) an incentive for inventors to disclose their inventions; and (3) to induce firms to invest in innovation of patentable inventions.23 While the first two goals reasonably follow from the constitutional language and the statutory requirements for patenting an invention, the third goal recognizes that even after an invention has been patented, "further investment is often necessary before [the invention] is ready for commercial exploitation."24 For example, many inventions will require the building of new plants or equipment before the commercial potential of the invention can be realized.25 Therefore in addition to the incentive to invent and disclose, the initial protection of a patent may enhance26 the likelihood that a patented invention can be successfully commercialized.27
B. Modern Patent Enforcement
The increasing importance of patents has resulted in more vigorous enforcement.28 In fact, enforcement has become a multi-billion dollar industry.29 Licensing agreements and settlements or remedies related to infringement litigation are crucial tools of modern patent enforcement.
While there are multiple types of patent licensing,30 a licensing agreement is essentially a contract between the patent owner and another party that wishes to have permission to practice the patent.31 In addition to actually practicing the patent, licensing allows patent owners to "extract hidden, additional value"32 from their intellectual property, much as a land owner may gain additional revenue by separately selling surface, mineral, and royalty rights all from a single plot of land.33
Patent licensing has evolved in the past century. Historically, the patent owners, corporations such as IBM who actually manufactured the patented inventions, were the major licensors of patents rights.34 For example, in the early 1990s Microsoft agreed to pay $30 million to license certain Big Blue patents. As part of the settlement, IBM required Microsoft to turn over the Windows 3.1 source code to ensure compatibility with IBM's OS/2 operating system.35 One can appreciate the economic importance of licensing by noting that all together, the IBM Corporation alone takes in about $1 billion a year in licensing revenue.36
Eventually, other companies that developed but did not practice the patented technologies started licensing their patents.37 For example, Qualcomm Inc., founded in 198 4,38 develops patented cellular technologies and licenses this technology to cell phone makers, all without actually manufacturing cell phones.39 Qualcomm designs and manufactures digital wireless telecommunications products based on CDMA technology. Sales of integrated circuits, license fees, and royalties for the use of its patents provide the company's primary sources of revenue.40
With businesses increasingly drawing their revenue from licensing agreements, patent enforcement companies entered the market. These enforcement companies do not seek to develop or outright acquire patents; rather, the companies merely provide the patent owner with the service of patent enforcement. one enforcement company, Mahr-Leonard Management, has represented everyone from National Semiconductor Corp. to Gilbert Hyatt, the inventor of the microprocessor.41 The average license fee negotiated by Mahr-Leonard is $10 million, of which it receives a twenty to twenty-five percent commission.42 Since 1988, the company has negotiated more than $700 million worth of licenses.43
Recently, a new breed of company has emerged¡ªthe companies that Detkin described as "patent trolls." One of the leaders in this new breed is Acacia Technologies.44 Acacia employs more lawyers and accountants than engineers.45 Moreover, the engineers' job is not to create technology, but just to evaluate patents.46 In fact, Acacia's sole business is the acquisition and license of patents, followed by aggressive patent enforcement.47 Unlike the three previously mentioned types of companies, "for Acacia Technologies . . . speculation is the heart of the game."48 So far, Acacia has made millions from licenses and settlements involving streaming media technology, the V-chip, and video on demand.49 As of 2004, Acacia has generated $24 million from the licensing of the V-chip alone.50
III. The Rise of the Patent Trolls
Unlike copyright owners,51 patent owners do not have a robust market in which to license patents, nor do patent owners have a compulsory licensing scheme mandated by law. Although the value of patents in general is higher than ever,52 often the individual patents are sold significantly mispriced because inventors undervalue their patents without objective information about how much the patent could be worth.53 Further, the pricing for patents is complicated by the unpredictable nature of technology and its future financial success. one famous example of the difficulty of estimating the expected value of present inventions is IBM's underestimation of the future market for home computers.54
The lack of a robust patent market combined with other economic conditions has given rise to patent speculators, the aforementioned "patent trolls." These patent trolls engage in what is more accurately termed opportunistic licensing.55 one non- technical example of opportunistic licensing is speculators who buy drilling rights for oil.56 Opportunistic licensors of patents are normally defined by two main characteristics. First, patent trolls tend to buy older patents, which may have been forgotten or overlooked (and thus cost less to acquire) but still play a roll in modern technology.57 Then they aggressively enforce these older patents against makers of relatively new technologies.58 Second, most patent trolls have no plans to practice the patent¡ªthey make all their money from licensing, often under threat of litigation.59
Patent trolling can be very lucrative for both patent owners and their lawyers. Suits can...
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